How Flight-to-Safety Creates Economic Opportunity
March 17, 2025
By Rick Patterson, Twin Bridge Capital
Key Points
- Market sell-offs drive Treasury yields lower, reducing mortgage rates and business borrowing costs
- Lower interest rates boost housing affordability, stimulating construction and increasing property values
- Businesses benefit from reduced capital costs, enabling expansion and creating a virtuous economic cycle
How Sell-Offs Can Stimulate Economic Growth
When stock markets plummet, headlines typically focus on the immediate negative impacts: trillions in market value erased, retirement accounts diminished, and investor confidence shaken. However, these dramatic sell-offs trigger a series of economic mechanisms that can ultimately produce significant positive effects across the broader economy. This report examines how market corrections, through the flight-to-safety phenomenon, can create favorable conditions for economic growth, particularly in housing and business sectors.
The Flight to Safety Mechanism: How Treasury Yields Fall During Market Stress
When equity markets experience significant downturns, a predictable pattern emerges as investors seek shelter from volatility. This "flight to safety" primarily benefits U.S. Treasury bonds, which are considered among the safest investments in the world.
Recent Examples from 2025
In February 2025, we saw this mechanism in action. According to Breckinridge Capital Advisors, "A stream of Executive Orders and Department of Government Efficiency (DOGE) announcements with implications for businesses and the economy, softer economic data, and geopolitics, appeared to have a cumulative effect on investors by mid-February. The result was a familiar flight of investor assets to the perceived safety of U.S. Treasury bonds. "The impact on Treasury yields was substantial: "By February 28, the closing 10-year U.S. Treasury yield was 4.24 percent, down from 4.79 percent on January 13, according to U.S. Treasury Department data." This represents a decline of 55 basis points in just six weeks. Similarly, in March 2025, Reuters reported that amid uncertainty related to new trade policies, "Safe-haven U.S. government debt saw more demand, with benchmark 10-year Treasury yields, which move inversely to prices, down to about 4.22%."
The Mechanics Behind Falling Yields
When investors rush to purchase Treasury bonds during market turmoil, their prices rise due to increased demand. Since bond yields move inversely to prices, this surge in demand pushes yields lower. As Investopedia explains, "The yield on the 10-year Treasury is a key indicator of investor sentiment about the economy's future health... A declining yield indicates that investors are seeking safety amid economic uncertainty which can be a sign of anticipated economic slowdown or deflation. "This relationship between market sell-offs and Treasury yields creates what some economists call a natural economic stabilizer. As equities fall, the resulting lower interest rates can help stimulate other sectors of the economy, potentially offsetting some of the negative impacts of the market correction.
How Lower Interest Rates Stimulate Housing Markets
The 10-year Treasury yield serves as a benchmark for various interest rates throughout the economy, with mortgage rates being among the most significant. When Treasury yields fall, mortgage rates typically follow, creating several positive effects in the housing market.
Increased Affordability and Purchasing Power
When mortgage rates decline, the monthly payment required to purchase a home of a given price decreases. As First Ohio Home Finance notes, "Lower rates mean lower monthly mortgage payments, allowing buyers to afford more expensive homes or save money on their monthly budgets. This can be particularly beneficial for first-time homebuyers who might be struggling to enter the market. "For example, a 0.5% decrease in mortgage rates on a $400,000 30-year fixed mortgage can reduce monthly payments by approximately $125, saving borrowers over $45,000 over the life of the loan. This increased affordability can bring homeownership within reach for many who were previously priced out of the market.
Stimulating Housing Demand and Sales
The affordability boost from lower rates typically translates into increased housing demand. According to Anchor Loans, "Lower interest rates generally lead to decreased borrowing costs, making mortgages more affordable for potential buyers and investors. This affordability can increase demand for properties, stimulate real estate investment, and create lucrative opportunities for investors. "This increased demand can help absorb excess housing inventory and stabilize or increase home values. First Ohio Home Finance explains that "As affordability increases, so does demand. More potential buyers entering the market can lead to a surge in home sales. This increased demand can be advantageous for sellers, potentially driving up home prices."
Property Value Appreciation
The relationship between interest rates and property values is generally inverse. Gatsby Investment states that "Property values are generally inversely related to interest rates. Low interest rates can boost property values by incentivizing more buyers to purchase homes while the cost of borrowing is low. "This appreciation benefits existing homeowners by increasing their equity and net worth. For the broader economy, rising home values can create a positive wealth effect, where homeowners feel more financially secure and may increase their spending in other sectors.
Refinancing Boom and Increased Disposable Income
Lower mortgage rates also trigger refinancing booms, allowing existing homeowners to reduce their monthly payments. Investopedia notes that "When people save money on their mortgages, they often have more disposable income to spend on other goods and services. This can lead to economic growth, which can have a positive feedback loop, further boosting the housing market as consumer confidence rises. "This increased disposable income from refinancing can stimulate consumer spending across the economy, supporting retail, services, and other sectors beyond housing.
Construction and Related Industries
A revitalized housing market typically stimulates construction activity, creating jobs in building, renovation, and related industries. This includes direct construction jobs as well as positions in manufacturing (building materials, appliances, furniture), retail (home improvement stores), and services (real estate agents, mortgage brokers, inspectors).The housing sector has powerful multiplier effects throughout the economy. The National Association of Home Builders estimates that building an average single-family home creates approximately three jobs for a year and generates tens of thousands in tax revenue for local governments.
Business Benefits from Lower Interest Rates
Beyond housing, lower interest rates resulting from market sell-offs can significantly benefit businesses across various sectors, potentially triggering broader economic expansion.
Reduced Cost of Capital
When Treasury yields fall following market corrections, corporate borrowing costs typically decline as well. The Federal Reserve explains that "Lower rates also can encourage businesses to borrow funds to invest in expansion, such as purchasing new equipment, updating plants, or hiring more workers."This reduced cost of capital improves the return-on-investment calculations for potential business projects. As the Reserve Bank of Australia notes, "Lower lending rates can increase investment spending by businesses (on capital goods like new equipment or buildings). This is because the cost of borrowing is lower, and because of increased demand for the goods and services they supply. This means that returns on these projects are now more likely to be higher than the cost of borrowing, helping to justify going ahead with the projects."
Debt Refinancing Opportunities
Similar to homeowners, businesses with existing debt can benefit from refinancing opportunities when interest rates fall. American Deposit Management points out that "With lower interest rates, businesses can save on loan payments. If your company has adjustable-rate loans, you could see the benefits of lower rates in the near future. "These savings can be substantial for companies with significant debt loads, freeing up capital that can be redirected toward growth initiatives, dividends, or other strategic priorities.
Increased Consumer Spending
Lower interest rates don't just affect businesses directly; they also impact consumer behavior in ways that benefit companies. As Investopedia explains, lower rates "have much the same effect on consumers, who might act on a major new purchase or buy a home because low financing rates make it achievable. "This increased consumer spending creates demand for goods and services across the economy, benefiting businesses in retail, manufacturing, and service sectors. Companies may see higher sales volumes without needing to discount their products, potentially leading to improved profit margins.
Enhanced Business Valuations
Lower interest rates typically lead to higher business valuations through multiple mechanisms. First, the reduced cost of capital means future cash flows are discounted at a lower rate, increasing their present value. Second, improved business conditions and growth prospects can lead to higher expected future earnings. These enhanced valuations benefit existing shareholders and can make it easier for companies to raise capital through equity offerings. They also facilitate mergers and acquisitions activity, potentially leading to industry consolidation and efficiency improvements.
Small Business Formation and Expansion
Small businesses, which often face greater challenges accessing capital, can particularly benefit from lower interest rate environments. Reduced borrowing costs can make entrepreneurship more accessible and support the expansion of existing small businesses. Since small businesses collectively employ nearly half of all private-sector workers in the United States, their growth has significant implications for overall employment and economic health.
Historical Examples: Market Corrections Leading to Economic Growth
The theoretical mechanisms described above have been demonstrated repeatedly throughout economic history. Several notable examples illustrate how market corrections and the resulting interest rate environments have contributed to subsequent economic growth.
Post-2008 Financial Crisis Recovery
Following the 2008 financial crisis, central banks around the world, including the Federal Reserve, implemented aggressive interest rate cuts and quantitative easing programs. The Reserve Bank of Australia notes that "Central banks lowered interest rates rapidly to very low levels (often near zero); lent large amounts of money to banks and other institutions with good assets that could not borrow in financial markets; and purchased a substantial amount of financial securities to support dysfunctional markets and to stimulate economic activity once policy interest rates were near zero. "These policies, combined with the natural flight to safety that occurred during the market crash, created an extended period of low interest rates that eventually contributed to one of the longest economic expansions in U.S. history. The housing market, after initially continuing to decline, began a sustained recovery around 2012 that saw home prices in many areas exceed their pre-crisis peaks.
COVID-19 Pandemic Recovery
The market crash at the onset of the COVID-19 pandemic in March 2020 was followed by a remarkably rapid recovery. According to Morningstar, "Though the initial downturn on March 9, 2020, was dramatic—the US stock market lost nearly 8% in one day—the US stock market ultimately recovered from that crash in just four months, making it the fastest recovery of any market crash over the past 150 years."FOREX.com attributes this swift recovery largely to policy responses: "The swift return to growth owed a lot to the actions of the US government and Federal Reserve. A massive fiscal rescue package and quick return to near-zero interest rates helped investors regain their confidence."The resulting low interest rate environment contributed to a housing boom, with home prices rising at their fastest pace in decades as buyers took advantage of record-low mortgage rates. Business formation also surged, with new business applications reaching record levels in 2021.
Early 2025 Market Volatility
The market volatility in early 2025 provides a recent example of the flight-to-safety mechanism. As previously noted, 10-year Treasury yields fell from 4.79% in mid-January to 4.24% by the end of February. While it's too early to fully assess the economic impacts of this yield decrease, early indicators suggest potential benefits for housing and business sectors.According to U.S. Bank, "In January 2025, existing home sales declined 4.9% compared to December 2024, maintaining an annualized sales pace of just over 4 million homes... One encouraging sign was that sales rose 2.0% from year-earlier levels." This year-over-year improvement, despite ongoing affordability challenges, suggests that the housing market may be responding positively to the recent decline in interest rates.
The Broader Economic Feedback Loop
The positive effects of lower interest rates on housing and business sectors can create a virtuous economic cycle that extends beyond these immediate beneficiaries.
Employment Growth
As businesses expand operations and housing construction increases, job creation typically follows. These employment gains provide income to households, supporting consumer spending and further economic growth.During the post-2008 recovery, the U.S. economy added jobs for a record 113 consecutive months from October 2010 to February 2020, reducing the unemployment rate from a peak of 10% to 3.5%, a 50-year low.
Tax Revenue Generation
Economic expansion generates increased tax revenue for governments at all levels. Property taxes benefit from rising home values, income taxes grow with employment and wage increases, and sales taxes rise with increased consumer spending.This improved fiscal position can allow governments to invest in infrastructure, education, and other public goods that further support long-term economic growth.
Banking System Stability
While market corrections can initially stress financial institutions, the subsequent economic recovery can strengthen bank balance sheets. Lower interest rates reduce default risks by making debt service more affordable for borrowers, while economic growth improves overall credit quality.Additionally, banks can benefit from increased lending activity as households and businesses take advantage of lower rates to finance purchases and investments.
Long-term Investment Returns
Despite the initial pain of market corrections, long-term investors often benefit from the subsequent recovery and growth. Morningstar notes that "When you incorporate the effect of inflation, one dollar (in 1870 US dollars) invested in a hypothetical US stock market index in 1871 would have grown to $31,255 by the end of January 2025. The substantial growth of that $1 highlights the enormous benefits of staying invested for the long term."This long-term growth perspective underscores that market corrections, while temporarily painful, have historically been followed by periods of recovery and expansion that reward patient investors.
The Current Economic Context (2025)
To understand how these mechanisms might play out in the current environment, it's important to consider the specific economic conditions of 2025.
Interest Rate Environment
After a period of elevated interest rates to combat inflation, the Federal Reserve began cutting rates in 2024. According to BlackRock, "After cutting the federal funds rate by 100 basis points in 2024, the Fed decided to maintain rates between the 4.25%-4.5% range at their January meeting, citing strength in the labor market and inflation remaining above target."Morningstar projects that "Rate cuts are on pause for now, but we think that's only temporary. We expect a further 2 percentage points in cuts to the federal-funds rate by first-half 2027, bringing it to a target range of 2.25%-2.50%."This suggests that while rates remain historically elevated, the trend is toward lower rates, which could amplify the positive effects of any flight-to-safety episodes.
Inflation Concerns
Inflation, while moderating, remains above the Federal Reserve's 2% target. Vanguard notes that their "2025 outlook for the United States includes expectations for continued growth just above 2%, core inflation only slowly returning toward the Federal Reserve's 2% target, and the Fed unlikely being able to cut its policy rate target below a 3.75%–4% range."This persistent inflation could limit the Federal Reserve's ability to cut rates aggressively in response to market corrections, potentially dampening some of the positive economic effects discussed earlier.
Housing Market Conditions
The housing market in early 2025 faces challenges related to affordability. U.S. Bank reports that "The combination of rising home prices and elevated mortgage rates means that housing affordability remains a meaningful problem," and that "Existing home inventory rose to the equivalent of a 3.5-month supply, according to the National Association of Realtors. Lagging existing home inventory has contributed to persistently high home prices."In this context, lower interest rates resulting from market corrections could provide particularly welcome relief to potential homebuyers, potentially unlocking pent-up demand.
Business Investment Outlook
Business investment has been constrained by higher interest rates and economic uncertainty. Charles Schwab notes that "So far, the economic data aren't pointing to recession, but there are warning signs of a growth slowdown. Fourth-quarter gross domestic (GDP) growth came in at a healthy 2.3% pace, driven primarily by consumer spending. However, the early data for this year suggest a slowdown is in the making."Lower interest rates could help counteract this slowdown by reducing borrowing costs and stimulating investment, particularly if economic uncertainty diminishes.
Potential Limitations and Considerations
While the mechanisms described in this report can produce significant positive economic effects, several factors can limit or complicate these outcomes.
Psychological Factors and Confidence
Market corrections can damage consumer and business confidence, potentially offsetting some of the benefits of lower interest rates. If households and businesses focus on the negative implications of a market sell-off rather than the opportunity presented by lower borrowing costs, they may delay major purchases and investments despite improved affordability.
Timing and Lag Effects
The economic benefits of lower interest rates typically don't materialize immediately. There can be significant lags between a decline in Treasury yields, corresponding drops in consumer and business borrowing rates, and the resulting economic activity.For housing, the time from lower mortgage rates to increased sales activity can be several months. For businesses, the planning and implementation of major investment projects can take quarters or even years, delaying the economic impact.
Banking Sector Constraints
For interest rate declines to stimulate economic activity, financial institutions must be willing and able to lend. If banks face capital constraints, regulatory pressures, or concerns about credit quality following a market correction, they may tighten lending standards despite lower rates, limiting the economic benefits.
Structural Economic Factors
Structural factors in the economy can influence how effectively lower interest rates translate into economic activity. For example, high levels of household or corporate debt may limit the ability to take on additional borrowing despite lower rates. Similarly, demographic trends, technological changes, and global competitive pressures can affect housing demand and business investment decisions beyond interest rate considerations.
Conclusion: The Paradoxical Benefits of Market Corrections
Market corrections, while disruptive and often frightening in the moment, can trigger economic mechanisms that ultimately support growth and recovery. The flight to safety during market turmoil pushes Treasury yields lower, reducing borrowing costs throughout the economy. These lower interest rates can stimulate housing activity, business investment, and consumer spending, potentially creating a virtuous economic cycle. Historical examples demonstrate that some of the strongest periods of economic growth have followed significant market corrections, particularly when the resulting lower interest rates are reinforced by supportive monetary and fiscal policies. In the current economic context of 2025, with interest rates still relatively high by recent historical standards and concerns about affordability in the housing market, the interest rate relief provided by flight-to-safety episodes could be particularly beneficial for economic activity. While various factors can limit or delay these positive effects, the fundamental relationship between market corrections, lower interest rates, and economic stimulus represents an important self-correcting mechanism within financial markets and the broader economy. For policymakers, businesses, and investors, understanding these dynamics can help inform decision-making during periods of market volatility. Rather than focusing exclusively on the immediate negative impacts of market corrections, recognizing the potential for subsequent economic benefits can lead to more balanced assessments and strategies. In this way, market sell-offs, despite their initial pain, can paradoxically contribute to the long-term resilience and growth of the economy—a silver lining that often becomes apparent only with the passage of time. In our opinion, stocks were whipsawed recently but still show encouraging internals throughout. There are many bright spots in the stock market under the surface. The daily volatility of tariff headlines and social media markets expert by day, door dasher by night is more noise than signal.
Sources
Breckinridge Capital AdvisorsFebruary 2025 Market CommentaryMonthly market commentary providing insights into economic trends, bond yields, and investment strategies
A stream of Executive Orders and Department of Government Efficiency (DOGE) announcements with implications for businesses and the economy, softer economic data, and geopolitics, appeared to have a cumulative effect on investors by mid-February. The result was a familiar flight of investor assets to the perceived safety of U.S. Treasury bonds. Yields fell as investors bought Treasury bonds. By February 28, the closing 10-year U.S. Treasury yield was 4.24 percent, down from 4.79 percent on January 13, according to U.S. Treasury Department data.
U.S. BankHow Changing Interest Rates Impact the Bond MarketAnalysis of recent bond market trends, interest rate movements, and their implications for investors
10-year Treasury yields fell from previous highs, falling by more than 0.50% in a matter of weeks. By the end of February, the 10-year Treasury yield slipped to 4.25%, still significantly higher than its mid-September 2024 level. The market's current yields are pricing in better economic growth, but we're not seeing higher inflation expectations, which is often what triggers an interest rate upturn.
J.P. MorganNavigating Rate Risks: How Bonds Are Better Positioned in 2025Market insights on bond investments, interest rate risks, and investment strategies for 2025
Bonds today are better positioned against a rate selloff. A concern often raised by investors who held bonds through the rate selloff of 2022 is the risk of adverse performance if rates increase again. The critical difference between a rate selloff now and the rate selloff that began in 2022 is that an investor today receives much more income because of the higher starting yield.
Given the growth scares in the U.S., fixed income is once again providing diversification. Yields on the 10-year are heading towards their seventh consecutive week of lower yields – the longest streak since 2019. The 10-year yield (4.26%) is 17 basis points lower this week and the 2-year yield (4.05%) has declined 15 basis points.
Fixed income does still help diversify portfolios; it hedges them specifically from growth shocks regardless of increasing correlations with equities. As such, we're reminding investors of some of the fundamental principles of fixed income investing to guide their 2025 portfolio allocation decisions.
VanguardVanguard Economic and Market Outlook for 2025: Global SummaryComprehensive economic forecast and market outlook for 2025, focusing on global investment trends and bond market expectations
Higher starting yields have greatly improved the risk-return tradeoff in fixed income. Bonds are still back. Over the next decade, we expect 4.3%–5.3% annualized returns for both U.S. and global ex-U.S. currency-hedged bonds. This view reflects a gradual normalization in policy rates and yield curves, though important near-term risks remain.
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Gatsby InvestmentHow Interest Rates Impact Real Estate InvestmentsAn analysis of how changing interest rates affect real estate investments, including financing costs, property values, and rental yields.
Interest rates affect real estate investments in three key ways: 1. The Cost of Financing: Lower interest rates decrease the cost of financing. This encourages more buyers and investors to enter the market, often leading to increased demand and more buyer competition. 2. Property Values: Property values are generally inversely related to interest rates. Low interest rates can boost property values by incentivizing more buyers to purchase homes while the cost of borrowing is low. 3. Rental Yields: When rates are low, increased home buying reduces rental demand, which can soften rental yields. With lower interest rates, investors don't need to charge as much in rent to cover their holding expenses.
InvestopediaFactors That Drive the Real Estate MarketAn exploration of key factors affecting real estate markets, with a focus on how interest rates impact property values and economic dynamics.
Changes in interest rates can greatly influence a person's ability to purchase a residential property. The lower the interest rate, the lower the cost of a mortgage. That's great for borrowers, but it can also create greater demand for real estate, which then pushes prices up. As interest rates rise, the cost of a mortgage increases, thus lowering demand and real estate prices. Lower interest rates can have a broader economic stimulus effect. When people save money on their mortgages, they often have more disposable income to spend on other goods and services. This can lead to economic growth, which can have a positive feedback loop, further boosting the housing market as consumer confidence rises.
Anchor LoansHow Falling Interest Rates Impact Housing Demand: Why Now is the Time to InvestA comprehensive guide to understanding how lower interest rates affect housing demand and create investment opportunities in real estate.
Falling interest rates can significantly impact the housing market, particularly in terms of housing demand. Lower interest rates generally lead to decreased borrowing costs, making mortgages more affordable for potential buyers and investors. This affordability can increase demand for properties, stimulate real estate investment, and create lucrative opportunities for investors. Lower interest rates can lead to a more robust housing market overall, creating a positive feedback loop where increased demand drives up property values, encouraging more investment and further boosting market activity. This environment is particularly beneficial for real estate investors who are well-positioned to take advantage of these trends by securing properties at lower costs and benefiting from the subsequent appreciation in value.
First Ohio Home FinanceThe Potential Impact of Lower Interest Rates on the Housing MarketAn in-depth analysis of how lower interest rates affect home affordability, market demand, and broader economic dynamics.
One of the most immediate and noticeable effects of lower interest rates is increased affordability for homebuyers. Lower rates mean lower monthly mortgage payments, allowing buyers to afford more expensive homes or save money on their monthly budgets. This can be particularly beneficial for first-time homebuyers who might be struggling to enter the market. As affordability increases, so does demand. More potential buyers entering the market can lead to a surge in home sales. This increased demand can be advantageous for sellers, potentially driving up home prices. However, it can also lead to a more competitive market, with multiple offers on desirable properties. Lower interest rates can stimulate the broader economy by encouraging spending and investment. When people save money on their mortgages, they often have more disposable income to spend on other goods and services. This can lead to economic growth, which can have a positive feedback loop, further boosting the housing market as consumer confidence rises.
MorningstarWhat We've Learned From 150 Years of Stock Market CrashesAn analysis of stock market crashes throughout history, exploring patterns, recovery times, and key lessons for investors.
Though the initial downturn on March 9, 2020, was dramatic—the US stock market lost nearly 8% in one day—the US stock market ultimately recovered from that crash in just four months, making it the fastest recovery of any market crash over the past 150 years.
When you incorporate the effect of inflation, one dollar (in 1870 US dollars) invested in a hypothetical US stock market index in 1871 would have grown to $31,255 by the end of January 2025. The substantial growth of that $1 highlights the enormous benefits of staying invested for the long term.
Reserve Bank of AustraliaThe Global Financial CrisisAn explainer on the 2007-2009 global financial crisis, its causes, impacts, and policy responses.
Central banks lowered interest rates rapidly to very low levels (often near zero); lent large amounts of money to banks and other institutions with good assets that could not borrow in financial markets; and purchased a substantial amount of financial securities to support dysfunctional markets and to stimulate economic activity once policy interest rates were near zero (known as 'quantitative easing').
Governments increased their spending to stimulate demand and support employment throughout the economy; guaranteed deposits and bank bonds to shore up confidence in financial firms; and purchased ownership stakes in some banks and other financial firms to prevent bankruptcies that could have exacerbated the panic in financial markets.
InvestopediaTimeline of U.S. Stock Market CrashesA comprehensive historical overview of major stock market crashes in the United States, their causes, and impacts.
Central banks and government policies, such as bailout packages or interest rate cuts, have helped stabilize markets and restore investor confidence during turbulent times. Market downturns can long affect how investors view risk, leading to shifts in investment strategies and risk tolerance.
Today's markets have sophisticated safeguards against crashes, including circuit breakers that automatically pause trading when stocks fall too far too fast. These 'speed bumps' are supposed to give investors time to assess market conditions more rationally.
FOREX.comStock Market Crash History: Past Financial Bubbles and CrisesAn exploration of historical stock market crashes, financial bubbles, and key lessons for investors and traders.
Often, stocks and other assets are already running too hot, and investor overconfidence quickly turns to fear. With many, there are early warning signs that are ignored. For some traders, this presents an opportunity to go short and reap huge profits from a crash.
The swift return to growth owed a lot to the actions of the US government and Federal Reserve. A massive fiscal rescue package and quick return to near-zero interest rates helped investors regain their confidence.
CNBCUS Treasury Yields: Investors Weigh the State of the US EconomyMarket analysis of US Treasury yields and investor sentiment during economic uncertainty
U.S. Treasury yields were sharply lower on Friday as investors ran for cover in the middle of a stock market sell-off, while concern over the health of the economy grew. The 10-year Treasury yield dropped about 7 basis point to 4.427%, and the 2-year Treasury yield was lower by more than 6 basis point at 4.202%.
Another fresh round of data releases reflecting a slowing economy is weighing on stocks and generating bull-flattener movements across the yield curve. More specifically, investors are embracing the long end of the Treasury complex due to the possibility that the strongest economic reports of the current cycle are behind us, incentivizing traders to lock in those rates before they potentially drift south.
ReutersInvestors Flee Equities as Trump-Driven Uncertainty Sparks Economic WorryAnalysis of market reaction to Trump administration trade policies and economic uncertainty
President Donald Trump's tariffs have spooked investors, with fears of an economic downturn driving a stock market sell-off that has wiped out $4 trillion from the S&P 500's peak last month, when Wall Street was cheering much of Trump's agenda. A barrage of new Trump policies has increased uncertainty for businesses, consumers and investors, notably back-and-forth tariff moves against major trading partners like Canada, Mexico and China.
Some defensive areas of the market held up better, with the utilities sector logging a 1% daily gain. Safe-haven U.S. government debt saw more demand, with benchmark 10-year Treasury yields, which move inversely to prices, down to about 4.22%.
Charles SchwabTreasury Bonds: Why Are Yields Dropping?Explanation of recent trends in Treasury bond yields and economic factors influencing their decline
Treasury yields have been falling for six consecutive weeks, with 10-year yields hitting the lowest level since December. Yet consumer surveys still indicate that inflation expectations are high and the Federal Reserve has indicated it is keeping its policy on hold indefinitely. That isn't the typical backdrop for declining bond yields.
To reconcile the market move with the data, we look to expectations. As we've pointed out several times, in general, government policies that impose trade barriers and limit immigration have the potential to raise inflation in the short run and slow growth in the long run. It looks like the bond market has decided to bypass short-term inflation concerns and focus on the long-term prospects.
Treasury yields have been falling for six consecutive weeks, with 10-year yields hitting the lowest level since December. Yet consumer surveys still indicate that inflation expectations are high and the Federal Reserve has indicated it is keeping its policy on hold indefinitely. That isn't the typical backdrop for declining bond yields.
So far, the economic data aren't pointing to recession, but there are warning signs of a growth slowdown. Fourth-quarter gross domestic (GDP) growth came in at a healthy 2.3% pace, driven primarily by consumer spending. However, the early data for this year suggest a slowdown is in the making.
InvestopediaDo Lower Interest Rates Increase Investment Spending?An explanation of how lower interest rates impact business and consumer investment spending
Lower interest rates increase business investment by making it cheaper and easier for businesses to borrow money in order to finance new projects. They have much the same effect on consumers, who might act on a major new purchase or buy a home because low financing rates make it achievable.
Federal ReserveWhy do interest rates matter?An official FAQ from the Federal Reserve explaining the importance of interest rates
Lower interest rates, for example, often encourage more people to obtain a mortgage for a home or to borrow money for an automobile or home improvements. Lower rates also can encourage businesses to borrow funds to invest in expansion, such as purchasing new equipment, updating plants, or hiring more workers.
Reserve Bank of AustraliaThe Transmission of Monetary PolicyAn explainer on how monetary policy and interest rates impact economic activity
Lower lending rates can increase investment spending by businesses (on capital goods like new equipment or buildings). This is because the cost of borrowing is lower, and because of increased demand for the goods and services they supply. This means that returns on these projects are now more likely to be higher than the cost of borrowing, helping to justify going ahead with the projects.
American Deposit ManagementHow Could Lower Interest Rates Impact Business?An analysis of how interest rate cuts affect business operations and profitability
With lower interest rates, businesses can save on loan payments. If your company has adjustable-rate loans, you could see the benefits of lower rates in the near future. On the other hand, if you have fixed rate loans you could see the effects whenever you refinance or take out new loans.
BlackRockWhat's in store for Fed policy in 2025?Insights on Federal Reserve policy, interest rates, and economic outlook for 2025
Markets anticipate the Federal Reserve to keep rates steady through the next few FOMC meetings, with potential 25 basis point rate cuts resuming thereafter. Fed policy for the rest of 2025 will depend on economic data. Key metrics to watch include inflation and the labor market.
After cutting the federal funds rate by 100 basis points in 2024, the Fed decided to maintain rates between the 4.25%-4.5% range at their January meeting, citing strength in the labor market and inflation remaining above target. As of December 2024, the U.S. Core Personal Consumption Expenditures (PCE) Price Index was
