A Cloud of Tariff Uncertainty Clouds the Outlook for Treasury Bonds Before Data is Released

U.S. Treasuries dropped in value as part of a broader decline in American financial assets, driven by ongoing investor unease surrounding President Donald Trump’s evolving tariff policy. This decline marked the beginning of a pivotal week filled with economic reports that will shed light on the condition of the U.S. economy, the largest in the world.

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The selloff in the bond market was particularly pronounced in longer-term maturities. The yield on the benchmark 10-year Treasury note rose by four basis points, reaching 4.44%.

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The yield curve also steepened, with the gap between five-year and 30-year yields nearing the 100 basis point mark — a level not seen at the close since 2021. These movements reflected growing skepticism among investors toward holding long-dated government debt in such a murky policy environment.

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Simultaneously, futures tied to major U.S. stock indices suggested a weak start to the trading session, and the U.S. dollar approached its lowest level since 2023. The continued uncertainty has added pressure to a market already cautious due to geopolitical tensions and mixed economic signals.

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“We understand why the longer end of so-called safe-haven bonds is out of favor right now,” wrote analysts from Rabobank, including Richard McGuire. They cited the unclear outlook for U.S. trade and economic policy as a major factor dissuading investors from committing to long-term Treasuries.

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This negative sentiment wasn’t limited to U.S. markets. Government bonds in both the eurozone and the United Kingdom also experienced declines. Like their American counterparts, these bonds saw yield curves steepen as investors sold off longer-dated securities more aggressively. This mirrored global concern that U.S. trade tensions could have broader economic implications, particularly if retaliatory measures are introduced.

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One major source of anxiety stems from Trump’s recent announcement that he would double tariffs on steel and aluminum imports — increasing them from 25% to 50% — as part of his stated effort to protect American industry and workers. Trump also accused China of breaching the terms of its trade agreement with the U.S., escalating fears of renewed trade friction between the world’s two largest economies.

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These developments have intensified the market’s focus on upcoming U.S. economic data. One key report due Monday is the Institute for Supply Management (ISM) manufacturing index for May. While economists expect a slight improvement, the reading is still projected to remain below the 50 threshold that separates expansionfrom contraction — underscoring the fragility of the manufacturing sector.

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Later in the day, investors will also hear from Federal Reserve Chair Jerome Powell, who is scheduled to speak alongside other central bank officials. Market participants are keenly awaiting any insights from Powell regarding the Fed’s view on trade tensions, economic resilience, and future interest rate decisions.

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The week will culminate in Friday’s closely watched U.S. nonfarm payrolls report, which could significantly influence market sentiment and the outlook for monetary policy. With uncertainty hanging over both the labor market and inflation trajectory, the data could either reinforce expectations for Federal Reserve rate cuts or challenge them.

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In the meantime, traders are reacting to the increased volatility sparked by trade headlines and political rhetoric. With the policy landscape so unpredictable, many investors are opting for shorter-term positions or seeking safety in cash and liquid assets, rather than locking up funds in long-term bonds with potentially shifting risk profiles.

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The rapid adjustment in yields and the broader risk-off tone reflect deeper worries about how protracted trade disputes might affect global supply chains, corporate earnings, and economic growth. While some analysts view Trump’s aggressive tariff strategy as a bargaining tactic aimed at securing more favorable trade terms, the lack of clarity and the potential for retaliatory actions are making markets nervous.

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In sum, the week has begun with a wave of selling in Treasuries and other U.S. assets, as President Trump’s tariff announcements and accusations against China stir fresh concerns. With key economic indicators and Federal Reserve commentary on the horizon, investors are bracing for more volatility. For now, caution reigns, and market participants are likely to remain defensive until more clarity emerges on both trade policy and the U.S. economic trajectory.

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