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April Fool’s is a day, not a month. As investors limp into May, however, the feeling of being constantly unsure of what to believe persists. Despite the broad recovery in US equities since Donald Trump’s trade tariffs rattled markets around the world, long-term Treasury yields have not fully followed suit. Their reticence is a sign of a deeper shift in investor views of the US.
On the surface, the rebound looks strong. US equity benchmarks ended April off a mere 1 per cent since the eve of “liberation day” and have rallied 12 per cent from their lows.
Bond markets appear to have recovered their poise, too, after a period where tumbling prices sent yields soaring, and would-be corporate borrowers were in effect left dangling. Benchmark US Treasury 10-year bond yields ended April pretty much where they were before Trump dropped his tariff bombshell. Those on two-year notes are a little lower because investors expect the Federal Reserve might soon cut rates to limit the slowdown in the US economy.
Meanwhile, Google parent Alphabet sold its first ever bonds in euros, part of a bumper $13bn US and European debt package, which investors lapped up. At the riskier end of the market, junk-rated Jane Street, the secretive high-speed trading firm, last week tapped the bond market for $1.4bn.
So why any frown at all? The sticking point is that yields on 30-year Treasuries ended April a little higher than where they started, at just under 4.7 per cent. Movements in the so-called long bond do not reflect near-term drivers such as earnings or interest rate expectations. So they stand as a more general reflection of investor thinking about the US.
The rise isn’t down to inflation, either — the most typical cause of higher long-term bond rates — because yields on the equivalent inflation-protected bonds rose by just as much. The gap between the two rates is used as a guide to how much the market thinks long-term consumer prices will rise. At 2.2 percentage points, they’re virtually unchanged on the month.
Mostly, the market ended April in a spring-like mood. But the dollar didn’t quite. It has lingered near three-year lows against other major currencies. It’s as if investors are a bit less confident in their future claims on the US government than they were. For all the surface calm, it is worth watching these undercurrents.