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In contrast, the S&P 500 fell 4.6% in Q1, and the Nasdaq tumbled 10%, its worst quarterly performance since 2022. However, equity markets remain driven by shorter-term sentiment and sector-specific impacts, while bond yields more accurately reflect macroeconomic expectations. The consistency in yield movements suggests investors are preparing for broader, sustained pressure on economic growth.
Tariffs Seen as a Drag on Growth
Trump’s tariffs—expected to apply to “virtually all countries”—are widely viewed as inflationary and growth-suppressing. They function as a tax on both consumers and producers, increasing input costs and reducing purchasing power. The bond market, sensitive to such macro effects, is reacting accordingly.
With economists forecasting just 0.3% GDP growth in Q1—down from 2.3% in Q4 2024—the Treasury market’s caution appears well-founded. The flattening yield curve also points to rising concern about longer-term economic softness.
Fed Rate Cut Bets Gain Traction
Falling yields are also indicative of shifting expectations for Fed policy. If tariffs prove to be a drag on demand, rate cuts could come into play. The 2-10 spread narrowing further supports this, as markets bet the Fed may need to step in to stabilize conditions.
Though some expect a relief rally if the tariff plan is less severe than feared, any such bounce in equities would likely reflect sentiment rather than a change in fundamentals. Bond markets remain the more telling signal of long-term expectations.
Market Forecast: Bearish
With Treasury yields declining across the curve and macro indicators pointing to weaker growth, the market tone is cautious.
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