Bond strategists expect US yields to fall despite tariff turmoil

By Sarupya Ganguly

BENGALURU (Reuters) - U.S. Treasury yields will fall, according to bond strategists polled by Reuters who say an economic slowdown in the wake of President Donald Trump's erratic and sweeping tariffs on trading partners will eventually compel the Federal Reserve to lower interest rates.

Their optimism on Treasury market performance comes as inflation expectations surge, creating hesitancy among Fed policymakers on rate cuts, and as nearly half of survey respondents said they were concerned about the market's safe-haven status.

A searing sell-off last week driven by hedge funds unwinding large leveraged bets pushed up the benchmark 10-year Treasury yield by more than 70 basis points to a near two-month high of 4.59%. 

While Trump’s surprise 90-day backtrack on reciprocal tariffs, except on China, has since calmed markets, investor sentiment has soured considerably. Some have even speculated a large-scale global exodus away from U.S. assets may already be underway.

Nearly half of strategists polled who answered an extra question, 15 of 32, said they were concerned about the safe-haven status of U.S. Treasuries. That compares with slightly more than one-third of FX analysts with similar worries about the dollar in a Reuters poll conducted two weeks ago.

Despite robust demand in a 10-year Treasury auction last week, several major U.S. sell-side banks have sounded similar alarms in their recent market commentary.

"The dramatic swings (last) week revealed cracks in the Treasury market that may remain visible for some time," Goldman Sachs strategists wrote in a recent note.

Still, more than 50 bond strategists in an April 10-15 Reuters poll predicted the 10-year yield, currently around 4.38%, would decline to a median 4.21% by the end of June before falling to 4.14% in a year. Forecasts for the 12-month horizon ranged from 3.40% to 5.00%.

Treasury market volatility, measured by the widely regarded MOVE index, shot to an 18-month peak last week and is still more than 50% higher than its long-term average.

"This week, it's my hope, without a lot of confidence, realized volatility comes down a little bit and the intermediate to longer-term themes of disinflation and slowing economic growth in the U.S. start to take hold and pull longer-term yields lower," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

"That said, I have much more confidence in an intermediate-term view which is towards lower yields than I do in a short-term view, which seems to be dominated by overextended positioning," LeBas added.

Fuelled by tariffs, consumer inflation expectations have hit their highest in more than 40 years which has effectively tied the Fed’s hands. Several officials have advocated for a pause in monetary policy moves until the economic outlook becomes clearer.

Yet interest rate futures are pricing in three Fed rate cuts this year compared with one or two priced in at the start of the year.

Bond market strategists appear a little more cautious - 60% of those polled, 18 of 30, said risks to their U.S. 10-year yield forecasts were tilted to the upside.

"The tariffs are likely to bring inflation (and) that's making the Fed reticent to cut rates," said Robert Tipp, chief investment strategist at PGIM Fixed Income.

"Slower growth makes a bad fiscal situation worse, plus the federal government is possibly going to change the rules on budgets and allow for current policy to be taken as the baseline. And that could allow for a more lenient budgeting process. All said, this would add a bit of an upward bias to rates."

(Reporting by Sarupya Ganguly; Polling by Renusri K and Aman Kumar Soni; Editing by Ross Finley, Hugh Lawson and Rachna Uppal)