It's Time to Buy Treasuries as Market Falls into Complacency

As we start the summer there are a few key things to watch:

Rates

I am moderately bullish on treasuries here and think bond yields could tick lower.

I think we had a lot of “lost narratives” that combined to push yields higher. The budget itself and the Moody’s downgrade helped spur yields higher, but much is overdone. 

Yes, frustration that DOGE didn’t save a lot more money impacted yields. While the administration claims that, at 3% growth, the budget pays for itself, we always hear that sort of optimism, which doesn’t always pan out. So, we are stuck with the realization that for all the hawkish talk on the deficit, it is difficult for politicians to cut. While I’m skeptical about how much tariff revenue will help (or how long lasting it will be), it is real for now.

My biggest concern was the almost inexplicable increase in yields across the globe — particularly in Japan.

That has settled down, so I’m back to thinking that 10s should be in a 4.2% to 4.6% range, making them a bit of a buy here.

I also think that Powell, with the lowered tariffs, has more ability to cut rates sooner, than under the “max” uncertainty we were facing.

The Trump Pivot and Trump Put

The president once again clearly looks at the stock market as a reflection of his success. While that doesn’t guarantee further rises, or even prevent some declines, it is a positive.

Shifting gears to the budget, de-regulation and what we have been calling "national production for national security" are all positives.

Tariffs remain a potential issue, though the market seems to be in the mode of discounting aggressive tariff posts on social media as they seem to be overstating the reality (for now). It makes some sense to behave this way, but be careful as the administration could take the recent success in the stock market as an opportunity to double back down on tariffs (not my base case, but certainly a non zero probability).

Uncertainty

Wall Street seems to be relatively “certain” things are OK. From overall levels, to VIX, to various “fear and greed” indicators, the mood is reasonably positive out there.

That contrasts with the messaging I’m getting from Main Street (corporate America, especially small- to medium-sized businesses, and even individuals).

The impact of tariffs and what some call “strategic uncertainty” (others call it erratic policy shifts) has not really been seen in any of the so-called “hard data.”

There are some valid reasons for this — changes in pricing, spending, etc., especially for corporations, take time to work their way through the system. Spending decisions and pricing for the first half of 2025 in many cases (if not the entire year) were made last year. So the reaction takes time.

On the tariff front, their was a surge in imports, a lull during peak tariffs, and then an increase again, while the “pause” was put in effect. We should see much in terms of price increases, or shortages, if they are coming, until June or July.

The impact might turn out to be small, which is what the market is pricing in.

My suspicion is that the market is being a bit too complacent, which is what I’m trying to focus on this week. Where can we look to find indications of whether the anecdotal negatives surrounding tariffs and policy will hit the economy (and therefore markets) or not?

Bottom Line

Lots of potential positives, fewer likely big negative surprises, but has the market discounted some impacts already in the system that will start to show up?

I’m in the latter camp, but not aggressively so, and it does support buying/owning treasuries up here.