10-Year U.S. Treasury Yield Surges 29% Since Trump's Tariffs

Last week, the rise in the 10-year U.S. Treasury yield sparked investor concern, as the market worried about the diminishing appeal of U.S. Treasuries as a safe-haven asset amid global trade policy turbulence. However, Nicholas Colas, co-founder of DataTrek Research, noted that if U.S. Treasuries were indeed facing a "turning point," real interest rates should have already risen to a new high for the year, which has not been the case.

Real interest rates, which are yields after accounting for inflation expectations, are typically calculated from the Treasury Inflation-Protected Securities (TIPS) market. Colas pointed out in a Tuesday research report that while the rise in the 10-year real U.S. Treasury yield last week was notable, especially against the backdrop of volatile U.S. stock markets, current rates have not exceeded the year's high, and thus should not be overinterpreted.

According to data from the Federal Reserve Bank of St. Louis, on April 11, the 10-year real U.S. Treasury yield rose to 2.28%, up from 2.21% the previous day. Since President Trump announced a new round of tariffs on April 3, this indicator has surged from 1.78%.

Brian Ellis, a fund manager at Morgan Stanley Investment Management's Broad Fixed Income team, stated that when the 10-year real yield breaks above 2%, it could inhibit economic growth. He currently favors the 2- to 5-year U.S. Treasury range, as this segment would benefit the most from price appreciation if the Federal Reserve cuts rates due to economic slowdown.

Ellis explained, "If growth concerns persist, this part of the yield curve still has room to fall and will outperform other maturities." This is because this segment is most closely linked to the expected path of monetary policy, with the market widely anticipating that the Federal Reserve will cut rates this year.

Despite market expectations of a rate cut this year, Ellis noted that the "term premium" on 10-year U.S. Treasuries could rise due to investor concerns about declining long-term demand. These concerns stem not only from U.S.-Europe trade disputes but also from the widening U.S. fiscal deficit and increased debt supply.

Ellis also suggested that part of the recent rise in yields could be due to leveraged investors, such as hedge funds, adjusting their positions, driving market volatility.

Meanwhile, fund flows indicate that investors prefer short-term U.S. Treasuries. According to a report released by a major bank on Monday, from April 4 to 10, fixed-income mutual funds and ETFs saw overall outflows, particularly in high-risk corporate bonds and long-term government bond funds. However, short- and medium-term government bond funds saw inflows, reflecting investors' shift towards defensive positioning.

Colas further pointed out that, based on long-term historical data since 2003, the current level of 10-year real yields is not abnormal. "From 2003 to 2007, real yields hovered around 2%, and they are around the same level now," he emphasized. The truly anomalous period was during the 2008 global financial crisis, when real yields briefly spiked to 3%.

"If real yields rise to 2.5%, approaching the high of October 2023, that could have a more profound impact on capital markets," Colas added. "But we are not there yet."

As of Tuesday afternoon, the U.S. Treasury market saw a broad rally, with yields falling. According to FactSet data, the 10-year U.S. Treasury yield was around 4.33%, down about 4 basis points from the previous trading day. Notably, the yield increase last Friday was the largest weekly increase since November 2001, indicating the market's high sensitivity to policy and economic outlook.