In an environment where global markets are shaken by tariffs, the volatility of US Treasuries has unexpectedly increased. Initially, there was a surge in hedge buying during the stock market downturn, but recently, a sell-off has occurred. What exactly is happening? How should we observe future trends? Influencing Treasury prices typically falls into three categories: market sentiment, changes in benchmark interest rates, and inflation expectations. Market sentiment and interest rate fluctuations generally impact bond prices quickly, whereas inflation expectation changes take longer to reflect but have lasting effects. For those looking to profit from Treasury-related products in the short term, the focus should be on clear changes in demand for safe-haven assets or discussions surrounding interest rate hikes or cuts.

Starting from late March, the threat of tariffs led to a drop in stock markets, triggering a surge in hedge demand. Investor concerns over worsening US economic data also spurred expectations that the Federal Reserve might begin cutting interest rates early. According to the GDPNOW model from the Federal Reserve Bank of Atlanta, the data through April 3 indicates that the GDP annualized rate in the first quarter may show a contraction of 2.8%. Despite this decline, the extent of economic shrinkage has slightly eased. If subsequent retail sales data continues to be poor, the previously anticipated stagnation may yield signs of recession, prompting the Fed to possibly start cutting rates as early as May, which could support bond prices significantly.

However, with the implementation of tariffs, inflation pressures in the US may rise rapidly in the second quarter, impacting longer-term bonds. Observing the figure, the yield on 10-year Treasuries dropped from around 4.4% at the end of March to 3.84% due to hedge-related demand, but after tariffs were enacted, the yield shot up to 4.499%. For investors holding a substantial amount of Treasuries and worried about inflation diminishing their bond prices, it may be wise to consider using the CME’s 10-year Treasury futures (CME Product Code: 10Y) as a short-term hedge. Investors looking for higher liquidity, without the need for stable interest payments, can also use this for short-term trading to effectively lower transaction costs and increase liquidity.

Investors can utilize CME's FedWatch free analytical tool to understand plausible interest rate ranges and probabilities for upcoming meetings through interest rate futures conversions, aiding in discerning potential market directions. For instance, the projected probabilities in the May interest rate meeting show a 58% chance of maintaining rates and a 44% chance of a rate cut. If the expected rate cuts or probabilities continue to climb, this may further depress 10-year Treasury yields. Observing these developments will assist in enhancing the likelihood of successful trading.