US 10-year Treasury yield hits 6-month low amid deepening recession fears

The yield on the US 10-year Treasury note fell sharply toward 3.9% on Monday, marking its lowest level in six months, as investors rushed into safe-haven assets amid escalating concerns over a potential trade war-induced recession.

This yield movement reflects deepening fears about the state of the US economy, as President Donald Trump continues to escalate tariff tensions with China and other major trading partners.

Market reacts to escalating trade war

The drop in bond yields came in the wake of Trump’s confirmation that his administration would move forward with reciprocal tariffs, even amid widespread market turmoil. Over the weekend, Trump stated, “Sometimes you have to take a medicine to fix something,” signalling his resolve to push forward despite investor anxiety.

The trade war intensified on Friday when China retaliated with a 34% levy on all US imports, a move expected to be mirrored by other key economies like Canada and the European Union. These countermeasures added to market fears of a global economic slowdown.

Investors seek safety in bonds

As uncertainty grows, investors are shifting their capital into US government bonds, a traditional safe-haven during volatile periods. This surge in demand for bonds has pushed prices higher and yields lower, driving the 10-year Treasury yield close to 3.9%, down from earlier levels above 4.3%.

Bond yields move inversely to prices, meaning that as demand increases, yields decline. The 10-year Treasury yield is especially important as a benchmark for mortgage rates, credit costs, and investor sentiment.

Fed policy outlook clouded

The ongoing trade tensions are complicating the Federal Reserve’s monetary policy path. The combination of potential slower economic growth and rising inflation due to higher import prices is presenting a challenge to the Fed’s dual mandate.

Despite this, markets are still pricing in 100 basis points of interest rate cuts by the end of the year. Such a move would be seen as a way to:

• Support growth amid global economic uncertainty

• Boost market confidence

• Offset the economic drag from tariffs

If the Fed follows through with rate cuts, bond yields could fall even further in the coming months.

Yield curve signals caution

The falling 10-year yield also raises red flags about the yield curve, which is a closely watched recession indicator. When short-term rates rise above long-term rates, or the curve inverts, it often signals that markets are expecting a significant economic slowdown.

Currently, the gap between short-term and long-term Treasury yields is narrowing, a potential precursor to a full yield curve inversion, which has historically preceded most US recessions.

Broader economic impact

The falling 10-year yield reflects wider market concerns, including:

• Reduced consumer spending due to inflationary pressures from tariffs

• Slowing corporate investment, as companies delay decisions amid trade policy uncertainty

• Lower business confidence, particularly in sectors reliant on global supply chains

If yields continue to slide, it could lead to cheaper borrowing costs, which might offer some relief to businesses and homeowners. However, if this decline is driven by deep-rooted economic fears, it may not be enough to prevent a slowdown.

Global implications

The US bond market often serves as a barometer for global risk, and the recent decline in the 10-year yield is sending a clear message: investors are nervous. As international markets digest the consequences of a potential prolonged trade conflict, similar patterns are emerging in other major bond markets, including:

• Germany’s bund yields falling further into negative territory

• UK gilt yields edging lower

• Emerging market bond volatility increasing

This synchronised drop in yields across major economies underscores the global nature of the economic risks currently at play.

Looking ahead

Analysts say the direction of US Treasury yields in the coming weeks will depend on several factors:

• Whether the Trump administration softens its stance or continues escalating tariffs

• How China and other countries respond

• The Federal Reserve’s next policy steps

• Signals from upcoming economic data, especially around inflation and employment

Until more clarity emerges, bond markets are likely to remain volatile, and the 10-year yield may continue its downward trajectory as recession fears persist.

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