Treasury yields (^TYX, ^TNX, ^FVX) are slipping to start the week after a wave of bond market selling sparked by renewed tariff tensions.
WisdomTree head of fixed income strategy Kevin Flanagan joins Morning Brief to break down what triggered the sell-off, how it was tied to policy moves, and what the Federal Reserve might do next.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
So just take us into the the induction of the selloff, uh, inducing of the selloff here, driven by some of the tariff policy and how much longer you're kind of pricing in for that continued play out?
Well, you know, typically, and thanks for having me on again. Uh, typically what you know, what you see is not just one headline or one factor. It it's a variety of forces. And I think that's what we saw this time around. It was a confluence of events of factors. First off, you get that reversal of that flight to quality trade. Remember, when the April second announcement came out, treasury yields actually dropped to 3.86% as a low. So we have that reversal. Then you have bets. Bets that that would continue to move forward, they have to be unwound. Some would call that the basis trade that you hear a lot about. Whether it's, you know, trying to trade on discrepancies between cash and futures prices. I don't want to go too far down that rabbit hole. And then I think there was just some outright selling to raise cash. And I think the bond market got through that turbulence now and and is trying to find its footing. So I think the worst is probably behind us in terms of the turbulence. And the Fed has a variety of tools at their disposal to help things out. Not rate cuts, using their balance sheet to try to smooth things out if need be.
So it sounds like you think that the Fed could potentially intervene here. What makes you think that? Just given the fact that we've heard from several members of the Fed saying that they don't really have an interest to come in and fix a problem caused by the White House.
Yeah, and not yet, not yet. So you know, the way you look at this is go to the funding markets, the plumbing. The funding markets are so important. We saw this in the financial crisis, during Covid. If the Fed feels that there's dislocations that are becoming more widespread, and trading in the Treasury market does get to be a lot worse than what we saw last week, then the Fed comes in. So right now, I think they're going to hold back, keep their powder dry. But I think the messaging we got on Friday, I think it was from Boston Fed President Collins, that the Fed is ready to prepare. That's all you're going to get for now unless things worsen up.
