Treasuries Turmoil Gives Way to Calm as Traders Shift to Neutral

The Volatility Cycle: March’s Surge and April’s Retreat

The first quarter of 2025 began with a crescendo of geopolitical and trade-related uncertainty, sending U.S. Treasury yields soaring. By late March, the 10-year Treasury yield had surged to 4.51%, its highest level since November 2023, while the 30-year Treasury bond yield briefly spiked to 5.02%. This reflected fears of inflationary pressures from U.S.-China tariff wars and a potential disorderly economic decoupling between the world’s two largest economies.

However, by mid-April, markets pivoted. A successful 10-year Treasury auction on April 10—marked by a bid-cover ratio of 2.67 and strong demand from indirect bidders (e.g., foreign central banks)—helped stabilize investor nerves. By April 14, the 10-year yield retreated below 4%, settling at 3.99%, its lowest since October 2024. This marked a decisive shift toward calm, as traders recalibrated expectations for Federal Reserve policy and digested mixed signals from inflation and trade data.

The Fed’s Delicate Balancing Act

Federal Reserve Governor Christopher J. Waller’s April speech underscored the central bank’s dilemma: tariffs risked fueling inflation (potentially pushing headline CPI to 4–5% annually) while also threatening GDP growth. Waller outlined two scenarios:
1. "Large tariff" scenario: Persistent high tariffs could trigger slower growth, rising unemployment (to ~5% by 2026), and a potential recession, prompting rate cuts.
2. "Smaller tariff" scenario: Reduced trade barriers might allow the Fed to delay easing, maintaining restrictive policy to combat inflation.

The March 2025 CPI report added nuance. While headline CPI dipped 0.1% month-over-month in March, core CPI—a better gauge of persistent inflation—remained stubbornly elevated at 2.8% annually, though at its lowest since March 2021. These mixed signals left markets pricing in 100 basis points of rate cuts for 2025, despite the Fed’s current 4.25–4.50% fed funds rate.

Trader Positioning: Safety Over Speculation

The shift to calm was underpinned by dramatic shifts in trader behavior:
- Ultrashort Treasury ETFs dominated inflows. The iShares 0-3 Month Treasury Bond ETF (SGOV) saw its largest quarterly inflow ever ($9.5B in Q1 2025), while the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) attracted $3.5B during the April 3–7 volatility spike. These cash-like instruments became the "go-to" for risk-averse investors.
- Intermediate Treasury ETFs also thrived. The iShares 7-10 Year Treasury Bond ETF (IEF) gained $2.6B, reflecting cautious investors willing to accept modest duration risk.
- High-risk assets faltered. High-yield bonds and bank loans faced $6.7B in outflows during the same period, as traders shunned credit risk.

The Role of Geopolitics and Liquidity

The market’s pivot to calm was not without turbulence. The U.S. Dollar Index fell to a three-year low, signaling potential capital flight as foreign holders (e.g., China, Japan) adjusted allocations. Yet robust Treasury auctions—particularly the April 4–6 10-year and 30-year notes—showed foreign demand remained resilient. Analysts noted that while yields spiked 50 basis points in the week ending April 12, the MOVE Index (a measure of bond market volatility) hit a 12-month high, highlighting lingering anxiety.

Conclusion: A Fragile Calm, But Calm Nonetheless

The shift from turmoil to calm in Treasuries reflects a market grappling with two truths:
1. Tariffs and trade wars remain potent risks, capable of reigniting volatility if negotiations fail.
2. Traders have recalibrated expectations, prioritizing safety over yield. The $100B+ inflows into U.S. fixed income ETFs in Q1 and the 90-day tariff pause announced mid-April provided temporary relief, but the path forward hinges on policy outcomes.

Investors should note:
- The 10-year yield’s drop to 3.99% suggests markets now price in aggressive Fed easing, despite the central bank’s cautious rhetoric.
- Municipal bonds and investment-grade corporates may outperform if calm persists, but high-yield debt and emerging markets remain vulnerable to renewed trade tensions.

As Waller’s scenarios imply, the next phase of calm—or renewed chaos—will depend on whether policymakers can navigate the razor’s edge between inflation control and economic stability. For now, Treasuries have found a fragile equilibrium, but the geopolitical backdrop ensures no room for complacency.