Global bond yields cratered in the wake of U.S. Donald Trump’s tariff announcement last Wednesday, as investors hunt for any safe havens amid the stock market sell-off — but economists warn the rally may not be sustainable if inflation concerns weigh.
The yield on Germany’s 10-year bund — the benchmark for the euro area — had dropped from 2.72% on Wednesday to below 2.6% on Monday afternoon, though ticked higher to 2.65% at the end of the session. The yield stretched above 2.9% last month, as markets braced for a fiscal spending spree in Europe’s biggest economy. Yields move in the opposite direction of prices, with a lower yield indicating greater demand for government debt.
“The Bund rally is unwinding the region-wide tightening of financial conditions,” Rabobank analysts said Monday morning.
On recent market moves, they added: “If Trump were to reverse course in terms of last week’s announcements, this may serve to mollify the current market panic but is unlikely to prevent a slowdown. This is owing to the fact that such a move would only underline the unpredictability of the current policy environment which, itself, is a negative for confidence and risk appetite.”
Government borrowing costs have also tumbled in Asia. Japan’s 10-year bond yield on Monday hit a three-month low, coming off its biggest weekly decline since 1998, according to economists at Deutsche Bank.
Stateside, the 2-year Treasury yield had dropped to its lowest level since September 2022, with the 10-year yield at a six-month low. Indicating current levels of volatility, U.S. yields began to trade higher again Monday, with the 10-year Treasury yield up nearly 14 basis points at 12:11 p.m. ET.
Investors are parsing an extreme and unpredictable tariff policy and whether that will lead to a global growth slowdown, a U.S. recession, or changes in the path of central bank policy.
”The big flight to cash continues as investors seek a shelter for their money amid the tariff storm,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, said Monday.
“Banks are seen as barometers for economic health, and given the steep losses, red lights are flashing about a looming global recession. These warnings are also showing up in the bond markets. Falling treasury yields are an indication that the chance of recession is increasingly being priced in.”
George Lagarias, chief economist at Forvis Mazars, said bonds were still acting as a safe haven while an “overbought global equity market” sells off on volatility.
“Bonds have been in a very bad bear market since 2021, this is the firm time they’re rallying properly,” he told CNBC by phone.
He added that there were nevertheless several reasons why the bonds rally may not prove sustainable.
“One is if things stabilize and there’s no need to run toward safety. Events are very news-driven right now and within a week things could change. Inflation is still there, it’s still a problem, so do you want to be in bonds long-term if you fear inflation in the U.S?” Lagarias said.
“Another is if banks, to alleviate pressure on their balance sheet and take advantage of the bond rally, bring bonds out of ‘held to maturity’ into ‘available for sale,’ essentially meaning more bonds on offer and so more supply pressures.”
In the end, he said, “We could also see central banks affirming their presence, their put. They could do it verbally, extend credit lines, buy bonds, lower interest rates or say they will. If you’re riding the bond market you need to look out for these catalysts.”
Erik Nelson, macro strategist at Wells Fargo, also highlighted inflation concerns among investors.
“There’s a question at a certain point, how much can bonds continue to rally in this environment given the inflation risks,” he told CNBC’s “Squawk Box Europe” on Monday.
Federal Reserve Chair Jerome Powell “signaled no interest in cutting rates,” Nelson added. “If we go far enough, it becomes a pure demand shock and inflation concerns go out the window, but the key date to watch now is April 9, when the next leg of tariffs go into place.”
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