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U.S. Treasury bonds skyrocketing, will the Federal Reserve turn against us? Investors bet on economic collapse and interest rate cuts to save the day!

U.S. Treasury investors sense a shift: the Federal Reserve may pivot from combating inflation to saving growth! Treasury bonds have risen for six consecutive days, having fallen to their lowest point this year, with heightened sentiment. Morgan Stanley warns that the 10-year Treasury yield may break 4%, provided that market expectations for interest rates drop to 3.25%. Friday's PCE inflation data could be crucial—if it surprises on the dovish side, investors will rush to buy long-term bonds, pushing rates lower.

The market is booming

This week saw three U.S. Treasury auctions with overwhelming demand; on Wednesday, the 7-year Treasury bond yield was 4.194%, below the market expectation of 4.203%, and the earlier two and five-year bonds were also oversold. Traders are betting on two interest rate cuts of 25 basis points this year, with year-end rates around 3.65%. However, experts warn that without new fundamental support, the 10-year Treasury bond will struggle to break the psychological barrier of 4.25%, unless there is a significant drop.

Trump's tariffs complicate matters

Last year's weak non-farm payrolls had the Treasury yield hovering below 4% for months, and now Trump's tariff threats against Canada, Mexico, and the EU cast further shadows on economic growth. Morgan Stanley's chief strategist, Huonbach, said: "Changes in immigration policy could drag down GDP, and investors are bearish on neutral interest rates." U.S. Treasuries have risen 2.3% this year, outperforming the S&P 500's 1.3%; a February survey showed optimism for U.S. Treasuries to outpace the stock market.

Economic alarm bells ringing

EY's chief economist Gregory Daco stated that although the U.S. economy is robust, trade and policy uncertainties are amplifying volatility, leaving businesses and consumers in a wait-and-see mode. A Philadelphia Fed survey revealed that one-third of workers face layoff risks, consumer confidence has plummeted, and Citigroup's economic surprise index hit a new low since September last year. Budget cuts and tax reduction disputes further cloud the interest rate outlook.

The game of inflation and interest rate cuts

Core PCE has held steady at 2.8% for three consecutive months; Morgan Stanley predicts it will drop to 2.58% in January, with interest rate cuts expected in June. Jim Bianco of Bianco Research, however, stated: "Bonds are betting on supply and inflation effects; we will see the truth by the end of the year." Whether U.S. Treasuries rise or fall, and whether the Federal Reserve will step in, all depends on how this grand drama unfolds!