Yield Curve Update: A New Kind of Bad Economic News

Ever since Trump announced his trade war and Wall Street goliaths like J.P. Morgan and Goldman Sachs said that they did not price Trump’s signature policy into their market expectations, the yield curve has been the main event to watch in the markets. The stock market gets all the hype in our vacuous mainstream media, but anyone with any passing knowledge of markets knows that the bond market is where the smart money resides. The largest, most liquid market in the world is for U.S. government debt—the Treasury Bond market—and yields (interest rates) on Treasuries are telling a pretty harrowing story about the U.S. economy right now.

The first week that the market adjusted its expectations for a world where Trump makes everything more expensive, returns on the yield curve inverted. This is as loud and clear a signal as the bond market can send, as it means it is concerned about high inflation in the short-term, and low growth in the long term. Another way to interpret an inverted yield curve is as perhaps the most classic harbinger of a coming recession.

But since that first inverted week, yields on Treasuries have been all over the place. Over the last week, they have all plummeted, which may be an even more worrying sign than an inverted yield curve. The reason that yields across the board would plunge is simple: expectations for growth have fallen way off, and the explanation for why is blatantly obvious, as the New York Times noted.

A measure of corporate activity from S&P Global published last week showed business expansion slowing in the United States in February as a result of “uncertainty and instability surrounding new government policies” such as federal spending cuts and tariff-related developments.

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The housing market is also feeling pressure. The National Association of Homebuilders said in its latest report that builder confidence had fallen to a five-month low because of concerns about tariffs, elevated mortgage rates and high housing costs.

Mentions of tariffs in earnings calls jumped in February- firms are talking a lot about trade policy uncertainty and tariff announcements

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— Courtney Shupert (@courtneyshupert.bsky.social) February 27, 2025 at 9:07 AM

Inflation has been the number one boogeyman in America the past few years for good reason, but a little bit of inflation is necessary to keep the economy humming (the Federal Reserve targets a two percent inflation rate). If rates across the board are falling hard, that means the market expects lower inflation, which is another way to say it is preparing for low economic growth.

The story this chaotic movement in yields tells is one of confusion and concern, as the yield on the two-year Treasury Note rose over six percent in December and has fallen over six percent in the last two weeks. The worry lies in whether the larger threat to the market is the increased inflation that is guaranteed to come along with Trump’s trade war, or the decreased growth that all this madness is certain to eventually lead to. The writing on the wall for markets is so clear, even Fox Business is preparing their viewers for an economic downturn at this point, and Trump’s former National Economic Council Director Larry Kudlow said on Fox Business that “at least for now, the economic signals are flashing slower growth and higher inflation, not good.”

The April jobs report is certain to be catastrophic, since it will include all of Elon Musk’s deranged cuts to America’s largest employer, the federal government. The guaranteed rise in the unemployment rate we will experience in the coming months is likely part of the deflation of bond yields right now.

The expectation that there will be fewer jobs out there 6 months in the future just surged to its highest level in over a decade

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— Joe Weisenthal (@weisenthal.bsky.social) February 25, 2025 at 8:19 AM

Musk and company have already tried to paint this fall in yields as good news, because one of the effects of the 30-year Treasury Bond yield plunging is that mortgage rates should fall with it. If it were just the longer-term yields falling, they may have a point, but yields are tanking across the board in every conceivable timeframe. Treasuries that mature under four years are falling harder than those that will mature outside of this Trump administration, proving beyond a shadow of a doubt what the market’s chief concern is: the co-presidents of the United States. The mounting economic destruction Trump and Musk are creating is bound to lead to a slowdown in growth at minimum, and the chaos in the bond markets proves that a full-blown recession driven entirely by Musk and Trump’s policies is smart money’s biggest concern right now.