The imposition of tariffs has stirred market expectations of higher inflation and weaker growth, prompting a significant shift in investor positioning. Traders and investment managers are increasingly moving into long-term Treasuries, driving up demand and reflecting a bear flattener scenario where lower growth expectations suppress longer-term yields. Meanwhile, the anticipation of higher inflation is supporting short-term interest rates, contributing to a wider rate differential that has bolstered the dollar. This dynamic is further complicated by geopolitical uncertainties, which have increased the appeal of gold as an alternative reserve asset amid potential reductions in dollar reserve assets.
The market's response to tariffs is evident in the rapid increase in net long positions in Treasuries, as highlighted by the JPMorgan Client Treasury Survey reaching a 15-year high. This surge is primarily driven by real money inflows rather than speculative activity, indicating a cautious stance among investors. Additionally, Commodity Trading Advisors (CTAs) are aligning their strategies with bonds while reducing equity positions, reflecting a risk-averse sentiment that could lead to further stock market declines as positions are unwound.
As of 04:11 on February 4, the yield on the 10-year Treasury note (TNX) stands at 4.54%, unchanged from its last close. The market remains on edge, with the potential for rising yields if tariffs lead to tighter financial conditions and a reduced trade deficit, as anticipated by some analysts.