Investor sentiment in the U.S. Treasury market has shifted markedly this week. Yields on 10-year Treasuries have fallen from a peak of 4.8 percent in mid-January to below 4.3 percent, marking their lowest level in two months. The catalyst: a significant decline in consumer confidence, fueling concerns over the economic outlook.
According to the Conference Board, consumer confidence fell by seven points in February to 98.3, well below Wall Street’s expectation of 102.5. A reading below 100 is often seen as a sign of growing pessimism among consumers.
Despite mounting political and economic uncertainty, the market had previously shown resilience. Investors shrugged off Donald Trump’s overtures to Vladimir Putin, new tariffs on allies, and the White House’s efforts to consolidate power over financial regulators. Even Elon Musk’s suggestion that his deficit-reduction efforts should translate into lower yields failed to move the market.
“The Treasury yield is stuck between a rock and a hard place.”
Jean-Philippe Donge, Banque de Luxembourg Investments.
With economic data softening, bond investors appear to be taking a more cautious stance. “The Treasury yield is stuck between a rock and a hard place,” said Jean-Philippe Donge, head of fixed income at Banque de Luxembourg Investments. “Trump’s economic policies are fueling inflation expectations, yet at the same time, economic data is weakening.”
The reversal in Treasury yields is notable, especially given how, just two weeks ago, a stronger-than-expected January inflation report cast doubt on the Federal Reserve’s ability to move forward with rate cuts. The Fed has since indicated it will hold rates steady for now, awaiting further data before making any policy adjustments.
10-yr Treasury yields at two-month lows
The drop in Treasury yields marks a sharp reversal from two weeks ago, when a stronger-than-expected January inflation report cast doubt on the Federal Reserve’s ability to press ahead with rate cuts.
The Federal Reserve then indicated it would pause its rate-cutting cycle to assess incoming data.
Markets and the Fed are in sync
The drop in yields has yet to trigger a major risk-off move in markets. Stocks have weakened in recent sessions, but credit spreads remain stable, suggesting limited financial stress. The MOVE Index, which tracks bond market volatility, has edged higher but remains well below its November peak. Meanwhile, the U.S. dollar has declined alongside yields, and corporate bond spreads remain tight.
Markets appear to be aligning more closely with the Fed’s outlook. The rates market is currently pricing in just over one rate cut between now and the end of 2025.
“We need an incremental move in the inflation backdrop to force a break of the range,” said Jack Janasiewicz, strategist at Natixis IM in Boston, echoing Federal Reserve Chair Jerome Powell’s remark that the Fed “does not need to be in a hurry” to cut interest rates.
From a historical perspective, the dip in yields has been long overdue. Typically, rate cuts push Treasury yields lower, yet since the Fed began its cutting cycle, yields have actually risen.
10-Year yield still up 100 days after Fed rate cuts
“If inflation starts to pick up again, we should expect rates to return to recent highs. On the other hand, if data continues to show inflation cooling, it would be no surprise to see rates move lower,” Janasiewicz told Investment Officer.
Key data release on Friday
Although the U.S. inflation rate ticked up to 3 percent in January from 2.9 percent in December, the overall trajectory suggests price pressures are easing.
The core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, is expected to decline when new data is released on Friday, according to economists surveyed by Bloomberg.
Much of the inflation outlook will depend on economic momentum. In recent years, consumer spending has been the primary driver of growth. However, weak retail sales in December and the sharp decline in consumer confidence raise concerns about whether households can continue to sustain that role.
“This does not mean we should be blinded by single data points,” Luc Aben, an economist at Van Lanschot Kempen, wrote in his weekly newsletter this week.
The broader economic picture still shows that ‘Joe Sixpack’ —the American consumer— has “sufficient financial strength” thanks to a strong labor market, Aben said.
According to Janasiewicz, corporate balance sheets remain “in great shape,” and the economic cycle continues to be “supportive for corporate America.” “The bond market is staying patient and data-dependent, just like the Fed,” he said.
Meanwhile, data from JPMorgan indicates that economic uncertainty has become an increasingly important factor in the upward movement of Treasury yields since the market’s low in September. Trump’s victory in early November seemingly increased the uncertainty priced in the U.S. 10-year Treasury.