Powell's latest remarks reignite expectations of rate cuts, making U.S. Treasuries the new safe haven favorite on Wall Street

Ask AI · How did Powell’s remarks trigger a dramatic reversal in market narratives?

Recently, Powell said that for supply-side shocks such as the oil-price surge driven by war, the Fed has “limited controllability,” and he is inclined to keep interest rates unchanged and to temporarily “ignore” the impact of this shock. Against the backdrop of a rapid switch in market narratives, multiple top Wall Street institutions have reversed their previously cautious stance on the bond market. They have instead issued clear bullish calls on U.S. Treasuries, arguing that their safe-haven value is becoming increasingly apparent.

Over the past six weeks, global oil prices have surged by more than 60% as the situation in the Middle East has escalated sharply, marking the largest month-over-month increase in decades. However, contrary to historical experience, U.S. Treasuries—often seen as the “enemy of inflation”—have not faced sustained sell-offs as a result.

Instead, after Fed Chair Powell’s dovish comments on March 30—saying the oil-price shock could be temporarily overlooked—U.S. Treasury yields promptly fell sharply.

Wall Street’s focus has shifted quickly from fear of the inflation shock to deep concerns about slowing growth and even a recession.

From the “inflation trade” to the “recession trade”

Since late February, when the escalation of the U.S.-Iran conflict and the near-disruption of shipping through the Strait of Hormuz began, global oil prices have staged a surge.

Brent crude oil futures rose nearly 60% in March alone. This was the largest month-over-month increase for Brent crude oil futures since it began in 1988, breaking the 46% record set during the 1990 Gulf War. WTI crude rose by about 53%.

By all logic, such a drastic energy-price shock would directly push up inflation expectations, eroding the real returns of fixed-income assets—leading to falling bond prices and rising yields. For much of March, the market indeed followed this logic: WTI crude oil futures climbed from $67 to above $100, while the yield on the 10-year U.S. Treasury rose from 4.15% to 4.44%.

At the time, the dominant narrative in the market was the “inflation shock.” Investors worried that persistently high oil prices would raise costs across a wide range of commodities, forcing the Fed to maintain a tightening stance in the face of stubborn inflation—and even to consider raising rates.

French bank Banque de France’s U.S. interest-rate strategy head John Briggs recalled: “Before last Friday (the 27th), investors seemed to be more focused on the inflation impact of the oil-price rise, so they started to price in expectations for Fed rate hikes, pushing up U.S. Treasury yields.” This sentiment peaked on March 26, when Fed Vice Chair nominee Waller hinted that the neutral rate could be higher. The probability the market assigned to the Fed raising rates at least once during the year briefly surged to 52%.

Yet everything fundamentally changed on March 30. In a speech at Harvard University, Powell said that for supply-side shocks like the oil-price increase caused by war, the Fed’s “controllability is limited,” and he is inclined to keep interest rates unchanged and temporarily “ignore” the impact of this shock. He emphasized that, based on historical experience, energy shocks are typically short-lived; the standard approach for central banks is to wait patiently for them to fade on their own. He said the current policy is in a “favorable position” and the Fed can take a look first.

The market interpreted these remarks as a clear dovish signal and immediately flipped the trading logic. Powell’s comments “eased market concerns that the Fed would be forced to tighten monetary policy to curb an acceleration in inflation.” Traders quickly offloaded positions that had been betting on rate hikes and began to reprice the slight possibility of rate cuts by the end of 2026. Sentiment in the interest-rate futures market shifted dramatically—from being nearly certain of a rate hike before year-end to a probability that once priced in a 20% chance of rate cuts before year-end.

The market reaction was immediate. On Monday (the 30th), the 2-year U.S. Treasury yield, which is highly sensitive to policy, fell by more than 10 basis points during the session and closed down 8.19 basis points to 3.830%. The 10-year U.S. Treasury yield fell by 7.76 basis points to 4.350%. More importantly, this marked the second straight day that Treasury yields declined alongside rising oil prices—breaking from the pattern seen for much of March, when the two moved in sync upward.

BMO Capital Markets’ head of U.S. interest-rate strategy, Ian Lyngen, noted: “On Monday morning, the U.S. Treasury market rose because investors were focusing on the Middle East situation’s potential risks to global economic growth—not trading the conflict purely through an inflation-shock lens.”

Big Wall Street banks turn bullish on bonds

Against the backdrop of a rapid switch in market narratives, several top Wall Street institutions reversed their previously cautious stance on the bond market. They turned instead to be boldly bullish on U.S. Treasuries, arguing that their safe-haven value is increasingly coming to the fore.

Morgan Stanley was first to send a clear bullish signal, particularly favoring the allocation value of 5-year Treasuries. The firm believes that if energy prices continue to climb, they will further weigh on economic growth and raise the risk of downside outcomes. Higher oil prices would directly increase pressure on consumer spending, potentially causing consumption and business hiring to slow, which would weaken overall economic momentum. In this scenario, funds would shift toward safe-haven assets, and Treasury prices would be poised to rise instead.

JPMorgan also showed a significant shift in stance. In early March, the firm’s rates strategist Jay Barry had previously suggested selling 2-year notes, but on March 21 he changed to recommending buying. This shift indicates that market expectations are adjusting quickly. Since 2-year notes are highly sensitive to the Fed’s short-term interest-rate policy, Barry believes that if oil prices push toward $125 per barrel and meaningfully boost recession risk, the Fed’s policy focus may shift from fighting inflation to preventing recession—and it may even shift toward rate cuts. Once the Fed cuts rates, it would lift the price of short-term Treasuries and lower their yields.

Pacific Investment Management Company (PIMCO) Chief Investment Officer Daniel Ivascyn expressed even deeper concern. He warned: “Inflation shocks often quickly evolve into growth shocks, and we are right at the edge of a material weakening in the economy.”

Ivascyn believes that financial markets may be underestimating the risk that the U.S.-Iran conflict could sharply slow an economy that is already fragile. With oil rising above $110 per barrel and with little sign the conflict is ending, traders are currently mainly focused on the inflation shock. However, this round of selling has created an opportunity to lock in higher yields, because market worries about inflation are masking a bigger threat to economic growth. PIMCO expects the probability that the U.S. economy falls into recession over the next 12 months to be more than one-third.

Goldman Sachs also raised warnings about economic risk. The firm said the probability of a downturn in the U.S. economy over the coming year has risen to about 30%. EY-Parthenon put the recession probability as high as 40%. Goldman analysts pointed out that the market’s bets on the direction of rate hikes may already be wrong, and that risks to economic growth are starting to outweigh inflation risks.

BlackRock and Columbia Threadneedle, among other large asset managers, have also joined the bullish camp. BlackRock’s head of fixed-income investments, Rick Rieder, said he believes the Fed should still cut rates to cushion economic shocks and is prepared to increase its buying intensity in short-term bonds once the outlook becomes clearer. Columbia Threadneedle portfolio manager Ed Al-Hussainy said instead that it has started increasing holdings of long-term bonds. He expects that if the Fed further drags on the economy by keeping high rates in place, long-term yields will eventually fall.

However, even amid a chorus of bullish views, there are still some calm warnings. Gennadiy Goldberg, head of U.S. interest-rate strategy at TD Securities, candidly admitted: “Not only is the geopolitical situation full of uncertainty, but market expectations for how the Fed will respond to these scenarios are also more uncertain.”

A more severe warning comes from concerns about “stagflation.” Jim McCormick, Citi’s chief global macro strategist, said that what lies ahead could be stagflation, which is bad news for both bonds and stocks. Historical data shows that during the Great Stagflation period from 1973 to 1982, the real annualized return on long-term Treasuries was negative, and the traditional 60/40 stock-bond portfolio would suffer a double hit.

Torsten Slok, chief economist at Apollo Global Management, argued that the yield on 10-year government bonds should be lower, around 3.9%. He said the current level that is somewhat elevated mainly reflects the market’s concerns about U.S. government spending, weakening overseas demand, and potential adjustments to the Fed’s independence and its inflation target.

Looking ahead, the U.S. March employment report to be released on April 3 will be the key indicator to watch. Ian Lyngen said that, compared with the February inflation data, the March employment report will for the first time reflect the war’s substantive impact on the economy, making it highly informative for the market’s direction. The market is anxiously waiting for this data to determine whether signs of economic slowdown have moved from concern to reality—so as to decide whether this round of “safe-haven inflows” into the bond market is just a prelude or the end of the story.

Reporter Li Xizi

Text editor Wang Zhex i