Bond markets in the US and Europe are having a turbulent time off the back of escalating trade war fears and tariff threats. US government bond yields rebounded after erasing most of their gains since August 2024.
Investors are still trying to assess recession probabilities and the Fed’s policy outlook. Meanwhile, the European Union is set to raise a €7 billion two-part bond to counter uncertainty from tariffs.
US Treasury Yields Surge After Historic Selloff
US government bonds took a hit on Monday, reversing part of their largest weekly gain since August. The selloff pushed yields up across all maturities by at least 20 basis points, with 30-year bond yields jumping nearly 23 basis points in late trading, the steepest one-day rise since March 2020.
This shift came as investors showed signs of regaining their appetite for risk, caused by a slight uptick in equity markets. ⁽¹⁾
President Trump’s tariff statement last week is the primary culprit for the volatility. The White House denied claims of a 90-day tariff pause, which increased uncertainty even as President Trump claimed progress in negotiations with Japanese officials. ⁽²⁾
US 30-Year Government Bond Yields: Source: TradingView
Federal Reserve Rate Cut Bets Fluctuate
Traders are adjusting their expectations for the Fed’s monetary action in 2025, with bets on interest rate cuts fluctuating between three to five 25-basis point reductions. As of Monday, overnight interest-rate swaps were priced in with four cuts, with the first fully anticipated in June. A May cut currently carries a 50% probability.
Earlier in the day, some traders had priced in five cuts and even speculated on an emergency reduction before the Fed’s May meeting—a rare move last seen during the 2020 coronavirus crisis. However, those expectations faded as the day progressed. ⁽³⁾
Fed Chair Jerome Powell stated last week that the central bank won’t rush to respond to tariff news or market turmoil, citing that inflation is still above the 2% target.
Recession Fears Mount in the US
Because of the uncertainty around tariffs, the threat of recession continues to loom. According to Chief Economist Michael Feroli, JP Morgan Chase & Co. recently forecasted a US economic slowdown this year, with Fed rate cuts beginning in June and lasting through January 2026.
On Monday, JP Morgan CEO Jamie Dimon expressed these worries and called for a quick solution to the tariff conflict. ⁽⁴⁾
Chicago Fed President Austan Goolsbee warned on CNN that large tariffs and retaliatory measures could disrupt supply chains and reignite inflation near 2021-2022 levels when prices hit a four-decade high. ⁽⁵⁾
Global markets have taken a hit since the tariff announcement. The S&P 500 has dropped 9.5% since April 2nd, triggered by Trump’s aggressive tariff plans and retaliatory levies from nations like China.
Fed officials, after cutting rates by a full percentage point in late 2024, have kept them steady in 2025, adopting a wait-and-see approach to assess tariff impacts. ⁽⁶⁾
European Union Bonds Enter the Fray
Across the Atlantic, European bond markets are grappling with heightened volatility.
On Tuesday, the European Union announced plans to raise €7 billion by using two existing bonds, a €5 billion portion of its 2.625% July 2028 bond and a €2 billion part of its 2.5% October 2052 bond amid the turbulence.
German 10-year Bund yields, a key benchmark, recently fell to 2.497% before edging up to 2.65%, reflecting a flight to safety as investors digest tariff-related economic risks. ⁽⁷⁾
German Government Bonds 10-Year Yield: Source: TradingView
Markets are now pricing in several rate cuts beginning in June as a response to a possible economic downturn, which is another way that the tariff uncertainty has changed expectations for European Central Bank (ECB) policy.
On Monday, volatility in Eurozone bond yields surged. Germany’s 2-year yield fell to 1.665%, its lowest since October 2022, before rising to 1.801%. With credit default swap indices reaching their widest level since late 2023, the EU’s bond issuance, which is overseen by institutions like BNP Paribas and JP Morgan, comes at a stressful time. ⁽⁸⁾
Investors are still on edge as they weigh their concerns about a recession against the ECB’s cautious approach to inflation.
