Treasury Yields Spike 4% as Powell Signals Caution on Rate Cuts

U.S. Treasury yields surged on Thursday following Federal Reserve Chairman Jerome Powell's remarks, which indicated that the central bank would not hastily reduce borrowing costs. This stance prompted traders to scale back their expectations for an imminent rate cut by the Fed. The two-year Treasury yield, which is particularly sensitive to policy changes, rose by 4 basis points to 3.82%. This shift in market sentiment led to a narrowing of the yield spread between two-year and ten-year Treasuries to 48 basis points, approaching its smallest level in a month. Powell's comments emphasized the Fed's cautious approach to monetary policy, highlighting the need for clarity on trade policy directions before taking any action.

Following the Fed's decision, U.S. Treasuries initially rose as investors focused on the policy-makers' mention of trade-related uncertainties that could lead to stagflation risks. However, by Thursday, market attention shifted to Powell's message that the Fed would adopt a wait-and-see approach. Evelyne Gomez-Liechti, a strategist, noted that the Fed is likely to remain on hold for some time, at least until the impact of tariffs on the U.S. economy becomes clearer. She advised the market to continue digesting some of the rate cut expectations.

The Federal Reserve unanimously voted to keep the benchmark federal funds rate in the range of 4.25% to 4.5%, a level maintained since December of the previous year. The pricing of swap contracts indicated a 20% probability of a 25 basis point rate cut at the next meeting in June, down from 30% on Tuesday and over 50% a week prior. Market participants continued to bet on three rate cuts this year, which would bring the rate down to the range of 3.5% to 3.75%.

Policy-makers acknowledged in a statement that both inflation and unemployment risks were increasing. The trade policies of U.S. President Trump have introduced significant uncertainty into the economy. While tariffs are still under negotiation, economists generally expect that expanded tariffs will drive up inflation and slow economic growth. Trump criticized the Fed's policy stance again on Thursday, asserting that there is almost no inflation in the U.S. and that Powell is "clueless." The president has repeatedly called for rate cuts to boost the economy and even hinted at the possibility of replacing Powell before his term ends.

Dan Ivascyn, Chief Investment Officer at Pacific Investment Management Company, stated in an interview that the likelihood of a U.S. economic recession is at its highest level in years. The company has slightly increased its holdings of U.S. Treasuries over the past two months, focusing mainly on short-term bonds. "Due to the uncertainty surrounding tariffs, which makes the outlook unclear, we expect the Fed to remain cautious and seek greater economic and policy certainty before making any significant policy moves," said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management. He anticipates that the Fed will begin cutting rates by 100 basis points starting in September.