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(Bloomberg) -- The rally in US government debt picked up steam on evidence that factory activity is shrinking amid the Trump administration tariff vows and that the labor market is gradually cooling.
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Tuesday’s advance sent benchmark 10-year Treasury yields down about seven basis points to roughly 4.13%, the lowest level since early March. Traders slightly boosted their bets on Federal Reserve interest-rate cuts, pricing in about 76 basis points of easing by December, versus about 74 before the data.
Treasuries have been rallying this week as investors await US President Trump’s scheduled tariffs announcement Wednesday and the release of March labor-market data Friday.
Financial market participants have been positioning for additional gains from US government debt after a first-quarter rally that left benchmark 10-year yields down about half a percentage point from their January peak. Trend-following hedge funds turned short US equities and long Treasuries last month, and the rotation has room to run, according to analysis by Barclays.
“Virtually all aspects of President Trump’s April 2 global tariffs announcement remain unclear,” said Oliver Blackbourn, a portfolio manager at Janus Henderson. “What is less uncertain is that tariffs are likely to be bad for economic growth, consumers and markets.”
In a sign of how concern around the economic outlook is intensifying, the bond market has gained to start the week even after New York Fed President John Williams warned on Monday that tariffs and other Trump administration policies could drive US inflation higher.
Some market watchers are skeptical that investors will get the clarity on US trade policy they’ve been waiting for. BlackRock International warns there will be more uncertainty after April 2 and that US yields are likely to edge up from here.
The rally “does not make sense,” said Vasiliki Pachatouridi, head of EMEA iShares fixed-income strategy at BlackRock International. “Inflation is still a sticking point, the hard data is not reflecting the picture the bond market is painting around recession and the expectation that the Fed is going to step in.”
Still, the moves gained momentum Tuesday after the Institute for Supply Management’s manufacturing index contracted in March for the first time this year as the drumbeat of higher tariffs reverberated through the economy. US job openings, meanwhile, fell in February while layoffs remained subdued — indications that the labor market is only gradually cooling.