US Treasuries Retreat as Strong Jobs Data Ignites Growth Optimism

The first quarter of 2025 has been a rollercoaster for U.S. Treasury markets, with yields spiking amid escalating trade tensions and a resilient labor market. The 10-year Treasury yield surged to 4.49% on April 11—the highest since mid-February—marking the sharpest weekly selloff since September 2019. This move underscores a critical shift in investor sentiment: despite persistent inflation risks and Federal Reserve caution, the U.S. economy’s underlying strength is prompting a rethink of growth expectations.

The Treasury Yield Surge: Trade Wars and Jobs Fuel Uncertainty

The yield’s ascent reflects two intertwined forces. First, the U.S.-China tariff war has reached unprecedented levels, with China raising tariffs on U.S. goods to 125% and the U.S. reciprocating with 145% duties on Chinese imports. These measures have injected volatility into global supply chains, eroding the "safe haven" demand for Treasuries that typically accompanies geopolitical turmoil. Second, the labor market’s resilience has defied recession fears. Nonfarm payrolls added 177,000 jobs in April, with the unemployment rate holding steady at 4.2%—a level last seen in the late 1960s. This has reinforced the Federal Reserve’s reluctance to cut rates aggressively, despite its "data-dependent" stance.

The 10-year yield’s climb from 4.21% in February to 4.49% in April highlights the market’s struggle to balance near-term risks (tariffs, inflation) with long-term growth optimism. Analysts now project the yield to dip to 3.88% by mid-2025, but this outlook hinges on whether trade tensions ease or worsen.

The Jobs Report: A Mixed Picture of Strength and Stagnation

The April jobs data revealed a nuanced labor market. While health care (+51,000), transportation (+29,000), and financial services (+14,000) drove growth, manufacturing shed 1,000 jobs, and federal government employment fell by 9,000—a trend that has cost 26,000 jobs since January. Wage growth also remains muted: average hourly earnings rose just 0.2% month-over-month to $36.06, with a 3.8% annual increase—below the Fed’s 4.2% target.

The divergence between service-sector vitality and manufacturing stagnation reflects the economy’s uneven recovery. While consumers are spending on services (e.g., healthcare, travel), tariff-induced cost pressures are squeezing goods-producing industries. This dynamic has kept the Fed in a holding pattern: the March 2025 dot plot envisions two rate cuts by year-end, but markets now price in three—a gap that fuels Treasury volatility.

Inflation and the Fed: A Tightrope Walk

The jobs report’s most worrying signal is the surge in consumer inflation expectations. The University of Michigan’s April survey showed one-year inflation expectations hitting 6.7%—the highest since 1981—despite core inflation cooling to 2.8%. This disconnect suggests households are pricing in tariff-driven price spikes, even if underlying metrics remain subdued.

The Fed faces a dilemma: continued rate hikes risk stifling growth, while cuts could ignite inflation if trade tensions ease. Chair Jerome Powell has emphasized "data dependency," but the central bank’s credibility hinges on navigating this minefield without triggering a bond market rout.

The Outlook: Yield Curve Signals and Market Risks

The Treasury market’s most ominous sign is the inverted yield curve. The 10-year yield briefly eclipsed the 2-year rate in early April, a classic recession signal. Historically, such inversions have preceded downturns within 11 months on average, though false positives (e.g., 1998) complicate the picture.

Analysts caution that this time is different. The Fed’s prolonged rate hikes and the structural impact of tariffs may prolong the inverted curve, making it a less reliable indicator. Still, the 30-year mortgage rate’s dip to 6.63% in April—a 12-week low—hints at market optimism about long-term growth.

Conclusion: Navigating the Crosscurrents

The Treasury market’s volatility in Q1 2025 reflects a tug-of-war between cyclical risks and structural resilience. While trade wars and inflation expectations have pushed yields higher, the labor market’s endurance and falling mortgage rates suggest the economy has not yet reached its peak. Investors must weigh two scenarios:

1. Tariff De-escalation: If U.S.-China trade tensions ease, Treasury yields could fall to 3.70% by mid-2026 (as projected by Trading Economics), as inflation moderates and growth expectations stabilize.
2. Policy Missteps: If the Fed delays rate cuts too long or tariffs worsen, the inverted yield curve could signal a sharper slowdown, pushing the 10-year yield below 3.5% as investors flee equities.

The April jobs report’s strongest takeaway is this: the U.S. economy is not yet faltering, but its trajectory depends on external shocks. For now, Treasuries remain a barometer of that uncertainty—a market where every basis point reflects the struggle to price in the unknowable.