Falling Yields Flash Recession Risk Ahead of Trump’s Sweeping Tariff Rollout

Bond Market Points to Economic Caution Ahead of Trump’s Tariff Rollout

As traders brace for President Donald Trump’s upcoming tariff announcement on April 2, Treasury yields are emerging as a more reliable gauge of economic sentiment than volatile equity markets. While stock benchmarks like the S&P 500 and Nasdaq have fluctuated sharply, bond markets are sending a clearer message: investors are preparing for potential economic headwinds.

Yields Drop as Bond Market Prices in Risk

The 10-year Treasury yield has declined 6 basis points to 4.184%, while the 2-year has slipped 3 basis points to 3.885% in recent sessions. Over the first quarter, the 10-year yield dropped 33.2 basis points, with the 2-year down 33.8 basis points. This steady decline indicates a broad shift in sentiment among fixed-income investors, who are increasingly pricing in slower growth.

In contrast, the S&P 500 fell 4.6% in Q1, and the Nasdaq tumbled 10%, its worst quarterly performance since 2022. However, equity markets remain driven by shorter-term sentiment and sector-specific impacts, while bond yields more accurately reflect macroeconomic expectations. The consistency in yield movements suggests investors are preparing for broader, sustained pressure on economic growth.

Tariffs Seen as a Drag on Growth

Trump’s tariffs—expected to apply to “virtually all countries”—are widely viewed as inflationary and growth-suppressing. They function as a tax on both consumers and producers, increasing input costs and reducing purchasing power. The bond market, sensitive to such macro effects, is reacting accordingly.

With economists forecasting just 0.3% GDP growth in Q1—down from 2.3% in Q4 2024—the Treasury market’s caution appears well-founded. The flattening yield curve also points to rising concern about longer-term economic softness.

Fed Rate Cut Bets Gain Traction

Falling yields are also indicative of shifting expectations for Fed policy. If tariffs prove to be a drag on demand, rate cuts could come into play. The 2-10 spread narrowing further supports this, as markets bet the Fed may need to step in to stabilize conditions.

Though some expect a relief rally if the tariff plan is less severe than feared, any such bounce in equities would likely reflect sentiment rather than a change in fundamentals. Bond markets remain the more telling signal of long-term expectations.

Market Forecast: Bearish

With Treasury yields declining across the curve and macro indicators pointing to weaker growth, the market tone is cautious.

Barring a surprisingly moderate policy shift on April 2, the bond market’s current trajectory suggests a bearish near-term economic outlook.

Traders should continue monitoring yields as the clearest signal of how tariffs will affect the broader economy.

More Information in our Economic Calendar.