Bonds Find Their Footing. Where Yields Go Next.

Yields on the U.S. Treasury Department’s 10-year bonds fell below 4% this month. (Eric Lee/Bloomberg)

After an uproar in the bond market over tariffs earlier this year, the Treasury market is on steadier footing this fall.

If the calmer trading pattern sticks, that would be good news for stock market investors and home mortgage borrowers since it means the 10-year Treasury yield could trade with less volatility and with a lower yield than earlier this year. The benchmark Treasury influences lending rates for many consumer and business loans.

The 10-year has had a positive October, with the yield dipping in recent sessions below 4% for the first time this year. The 10-year was at just above 4% Monday, below the high for the month of about 4.16%. That is well off the high of the year near 4.8%.

Treasury yields played their traditional safe-haven role earlier this month when stocks sold off. The 10-year yield fell a tenth of a percent on Oct. 10 after President Donald Trump threatened 100% higher tariffs on China. That is unlike when tariff news rattled investors in April. Treasury yields moved higher then amid fears that global investors were shunning U.S. assets and that inflation would ramp up.

Growth and inflation expectations are driving bonds now, said Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets. “We’ve also gotten through the point where people were worried about the dollar losing its status of reserve currency or a wholesale strike on the Treasury market,” he said.

Investors also worry yields could jump higher on concerns about high U.S. debt and the budget deficit. But the government has relied on issuing new short term debt, rather than issuing more costly longer term debt. That strategy has helped keep long-term yields down, he added.

Lyngen said the “major bond bearish concerns of the summer” seem to have faded for now. Trading more on fundamentals clears the way for a market environment where “3 handles replace 4 handles in the 10-year sector.”

The Federal Reserve, which meets this week, is expected to trim interest rates by a quarter point Wednesday, for the second month in a row. Market expectations for another reduction in December help subdue the entire Treasury curve.

Steven Brown, chief investment officer of fixed income at Guggenheim Partners, said the 4% level has acted as a floor for the 10-year, but when the Fed was cutting in 2024, the yield moved below that level.

“We’ve been of the opinion that 4% is the kind of the intermediate or longer-term median of where the 10-year should be,” said Brown. He expects the 10-year yield to stay in a range between 3.5% and 4.5%.

“We think it’s reasonable the trading range will stay, but that 10-year yields should migrate lower relative to where they were for most of the year,” he said.

International investors are continuing to buy Treasuries, and strategists say it appears they are diversifying their holdings rather than fleeing U.S. assets, as feared earlier in the year.

The trend lower in yields also comes amid the government shutdown, now in its 27th day.

“The longer it goes on, the more there could be some kind of structural damage, potentially,” Brown said. “But it’s mostly something that we think evens out at the end,” he said.

However, the shutdown could be a factor behind a less volatile bond market. The bond market has been trading with a dearth of government data. The only official report has been Friday’s consumer price index for September, which was 3% on an annual basis.

“We’ve been in a micro range. Part of that is without data, it is kind of hard to really have informed and different trading views. The market does tend to trade around certain data releases. So without them, that is probably suppressing volatility a little bit,” and it may have sent yields marginally lower, Brown said.

But there are issues in front of the market that could unsettle it, including Fed independence. The market is awaiting the nomination of a new Fed chair and whether the White House will succeed in removing Fed governor Lisa Cook. The Supreme Court will hear arguments in the Cook case in January.

The eventual reopening of government could also affect the market, particularly if the labor market has deteriorated more than expected. The one piece of data that was released was viewed positively. CPI inflation data for September was above the Fed’s target 2% but better than expected by economists.

“People are very excited about the [inflation] print because it gives the Fed an option to ease, but underneath it there are some things that matter that are just being dismissed,” said Greg Peters, co-chief investment officer at PGIM Fixed Income. He noted that there were signs of inflation in core goods, like furniture and apparel — areas hit by tariffs.

Peters said the Fed is in a tricky spot. “If you cut too much, the markets are going to price in higher inflation expectations, more concern around Fed independence, more concern about overheating risk. So, I think it’s more delicate than investors appreciate,” he said.

The market is also waiting for a Supreme Court ruling on whether Trump had the power to impose tariffs under the International Emergency Economic Powers Act. The hearing in that case is Nov. 5.

If the administration loses the case, the government may have to return the tariffs paid to it. That could rattle the bond market.

But the administration’s efforts since launching many tariffs in April suggest it will find a way to keep revenue flowing in.

“Tariffs are here to stay. They are likely to continue to be a pillar of geopolitical policy and obviously trade policy,” said Brown.

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