U.S. Treasuries slipped to extend this week’s selloff, diverging with gains in European bonds, as investors stayed cautious on U.S. assets due to Donald Trump’s combative stance toward the U.S. Federal Reserve.
Short-dated U.S. notes underperformed, while longer-maturity notes consolidated following the sharp slide on Monday. That contrasted with gains across the curve for German bonds, where two-year yields slid as much as six basis points to the lowest since 2022.
U.S. Treasuries, typically the world’s premier haven, have sunk in recent weeks as Trump’s efforts to overhaul global trade and pressure Fed Chair Jerome Powell to cut interest rates have shaken confidence in U.S. assets. Instead the euro area’s bonds have emerged as a place of shelter for investors after volatility ripped through global markets.
“If it really comes to pass that he does compromise the independence of the Fed, it will make the tariffs saga look like a picnic. This is a serious problem,” said UBS Group AG chief strategist Bhanu Baweja. “You’re compromising the exorbitant privilege of the U.S., you’re compromising interest rates in the U.S., you’re compromising for the rest of the world the cost of capital.”
The yield on two-year Treasuries rose four basis points to 3.80%, while the 10-year edged up to 4.43%. It closed nine basis points higher on Monday.
“We are seeing European investors repatriate some of their investments in the U.S. — the Mag 7, treasury bills and notes — and we expect that trend to continue as long as tariff policies and other anti-globalization policies are seriously discussed,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
While an auction of German two-year notes drew orders of €6.4 billion (US$7.4 billion) earlier Tuesday, the lowest since 2023, the front-end of the German curve remains attractive since it stands to benefit from additional interest-rate cuts from the European Central Bank. Sticky inflation is hampering the Fed’s ability to ease, but the ECB has a clear path to cut further following a seventh such reduction last week.
What Bloomberg strategists say
“Germany’s front-end bonds may see a mild correction after their recent feverish rally, but even so, they are poised to retain much of the recent gains after the European Central Bank’s remarkable dovish turn last week.”
— Ven Ram, Macro Strategist, Dubai.
Money markets added to wagers on the extent of ECB cuts on Tuesday, pricing about 70 basis points through year-end, three basis points more than at Friday’s close. Policymakers including Martins Kazaks have warned that U.S. tariffs are stoking uncertainty and raising the risk of an economic recession in the euro area.
With assistance from Naomi Tajitsu.
Alice Gledhill, Bloomberg News
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