Rising Recession Fears Fuel Treasury Bullishness: Why the 10-Year Note Is the New Safe Haven

The U.S. economy is caught in a precarious balancing act, with contractionary signals in GDP, muted inflation, and uneven jobs data converging to pressure Treasury yields lower. Despite the Federal Reserve's reluctance to cut rates, investors are pricing in recession risks over hawkish policy concerns—making the 10-year Treasury note a tactical long position of choice. Let's dissect the data and market dynamics driving this shift.

The GDP Contraction: More Than a Statistical Dip

The first quarter of 2025 delivered a stark reminder of economic fragility. Real GDP contracted at a -0.5% annual rate, its first decline since early 2022, as tariff anxieties and California wildfires upended activity. The BEA's third estimate highlighted two critical drivers:

1. Imports surged 37.9%, as businesses front-loaded imports to avoid impending tariffs, artificially inflating trade deficits.
2. Federal government spending dropped 4.6%, reflecting aggressive workforce reductions and defense cuts under the Trump administration.

Even sectors like private investment (+23.8%) and consumer spending (+0.5%) couldn't offset these drags. Crucially, real gross domestic income (GDI) also fell by 0.2%, reinforcing the GDP contraction's authenticity. Corporate profits plunged $118.1 billion in Q1, signaling a profit recession amid trade-policy induced headwinds.

Jobs Data: Strength Amid Fragility

The May jobs report underscored a labor market clinging to resilience but increasingly vulnerable to external shocks. Nonfarm payrolls rose by 139,000—above estimates—but downward revisions to prior months (totaling 95,000 jobs lost) revealed underlying softness.

• Sector divergence: Healthcare (+62,000) and leisure/hospitality (+48,000) powered gains, while manufacturing (-8,000) and federal jobs (-22,000) declined.
• Wage growth outpaced inflation: Average hourly earnings rose 3.9% annually, exceeding the 2.4% April inflation rate. Yet the household survey's 696,000 drop in workers hinted at hidden labor market stress.

The Fed's dilemma is clear: a robust labor market justifies rate stability, yet tariff-driven uncertainty and profit declines argue for caution.

Subdued Inflation and the Fed's Tightrope Walk

The PCE price index rose just 3.6% year-over-year in April, with core inflation (excluding food/energy) at 3.5%—levels last seen in early 2021. This has relieved pressure on the Fed to raise rates, but officials remain hesitant to cut.

The Fed's inaction stems from two fears:
1. Premature easing could reignite inflation if the economy surprises to the upside.
2. Tariff-driven supply chain disruptions could reverse inflation's decline.

Yet markets are already pricing in cuts. The 10-year Treasury yield fell to 4.38% in late June, a 24-basis-point drop from its May high, as investors bet recession risks will force the Fed's hand eventually.

Why the 10-Year Treasury Is a Buy

The case for a long position hinges on three factors:

1. Recession fears outweigh hawkish risks: Even if the Fed doesn't cut rates soon, weak GDP and corporate profits suggest yields will drift lower as growth concerns dominate.
2. Global bond markets validate the trend: Japan's 10-year yield hit 1.51% in May—its highest since 2007—due to inflation and policy shifts, but the U.S. Treasury's safety premium remains unmatched.
3. Valuation support: At 4.38%, the 10-year offers a yield cushion compared to the 2.51% German Bund or 3.49% Italian bond.

Risks to the Thesis

• Fed surprises with hikes: Unlikely unless inflation spikes again, but a July rate increase would crush Treasury bulls.
• Tariff truce with China: A sudden easing of trade tensions could boost growth and push yields higher.

Conclusion: Position for Recession Math

The Fed's “wait-and-see” approach isn't stopping markets from pricing in recession risks. With GDP contracting, corporate profits weakening, and jobs data showing cracks, the 10-year Treasury's decline isn't just technical—it's fundamental. Investors seeking safety in fixed-income markets should gradually build long positions in the 10-year note, hedging against a slowdown while the Fed remains on the sidelines.

The bond market is voting with its feet: recession math has already started, and the Fed's caution won't stop yields from finding new lows.