(April 3): The yield on benchmark treasuries fell briefly below 4% for the first time since October as Wall Street fretted that the US economy will end up worse off from President Donald Trump’s trade war.

Ten-year yields declined as much as 13 basis points on Thursday to dip below 4%, the lowest level since before Trump was elected last year. Meanwhile, money markets priced in a 50% chance of the Fed delivering four quarter-point rate reductions this year, a scenario that wasn’t even contemplated on Wednesday.

Concern that the steepest increase in American tariffs in a century will hammer economic growth is driving a fierce rally in global bond markets, with yields on European and UK bonds also plunging. Similarly, traders ramped up wagers on monetary easing from the European Central Bank and the Bank of England, increasing the chances that both deliver three more cuts this year.

“The bond market is a big winner,” said Kathleen Brooks, research director at XTB. “Central banks are likely to step up to ease some of the pain from the US’ new global trade policy.”

Trump’s tariff plan on Wednesday came much harder than expected, as he announced a minimum 10% levy on all exporters to the US and slapped additional duties on nations with big trade imbalances. The move escalated global trade tensions and sent investors rushing for safe havens.

The response in bond markets was sharp. European and US yields tanked across the board as investors spurned riskier assets. Ten-year yields plunged below 4% on Thursday before edging back to 4.03%. Two-year yields were down about 15 basis points to 3.7%.

Even the dollar, which has seen debate swirl over its status as a haven in times of uncertainty, was down some 1.5% as of 2pm New York time.

“The odds of recession are increasing given the timing of tariffs and tax policy. Meanwhile, monetary and fiscal policy are both restrictive — as are lower equity prices,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “The bond market is keying off of the negative growth impact more than any inflation concern from the new tariff regime.”

Traders priced in about 90 basis points of easing by the Fed by the end of the year, implying at least three quarter-point rate reductions this year — and a fair chance of a fourth.

Still, US inflation risks arising from tariffs have led Morgan Stanley’s economists to push back their call for the next Fed rate cut from June to early 2026. They see a terminal rate of 2.50% to 2.75%.

In the wake of Trump’s announcement, many are still wagering on more gains for US bonds. Strategists at Citigroup Inc upgraded treasuries to overweight, saying Trump was more aggressive than markets expected and the tariffs pose a clear risk to US growth.

“It looks like we’re cruising to recession now unless things change,” said Bob Michele, global head of fixed income at JPMorgan Asset Management on Bloomberg TV, contending that the inflation momentum is very different from post pandemic and is unlikely to be sustained. If these policies stick “the Fed can bring down rates a lot,” possibly to as low as 2.5% from 4.5% currently.

“The logical conclusion is that traders are expecting lower rates in the US, despite higher inflation. That’s not good news. Stagflation is the hardest environment for central bankers to deal with, but the message from the rates market Thursday is that the employment part of the Fed’s dual mandate will outweigh the inflation part,” said Sebastian Boyd, Bloomberg Markets Live Strategist.

Strategists at Goldman Sachs, Barclays, Royal Bank of Canada and Societe Generale have already cut their year-end forecasts for 10-year treasury yields. In large parts, they pointed to an uncertain economic backdrop, though questions also remain about Treasury Secretary Scott Bessent’s plans for issuance.

“Trade-related headlines will keep pouring over the coming weeks and investors will likely worry about growth implications until hard data dispels some of these fears,” said Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management.

Uploaded by Siow Chen Ming