Discounting The D.C. Effect In The Bond Market

2025-03-12 11:10:00 ET

Summary

• The bond market’s early-year narrative of rising yields shifted rapidly as policy uncertainty, changing tariff prospects and federal worker layoffs drove the 10-Year U.S. Treasury yield back to pre-election levels.
• Concerns over federal employment cuts have heightened scrutiny on private payrolls. The February jobs report revealed a healthy labor market but early signs of the 'D.C. effect' are impacting federal job numbers.
• While recent bond market rallies reflect investor caution, the next phase of Washington’s fiscal policy — including potential tax cut extensions — could introduce new headwinds for U.S. Treasuries.

By Kevin Flanagan

One thing we have seen underscored in 2025 is that the bond market can change its mind very quickly, particularly as it relates to policy emanating from Washington, D.C. Following President Trump's election win, the dominant theme in the U.S. Treasury ((UST)) arena was that his Administration's policies would lead to higher budget deficits, increasing UST supply and, ultimately, higher rates for maturities like the 10-Year yield....

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