Are U.S. bonds bottoming out? JPMorgan and Pimco: "Bond market sell-off" underestimates the "recession risk"

Ask AI · Why are institutions such as JPMorgan Chase optimistic about the current high US Treasury yields?

Several of Wall Street’s largest bond fund managers are betting that the market is severely underestimating the risk of an economic slowdown in the US—while last Friday’s unusual decline in US Treasury yields may be an early sign that this logic is beginning to materialize.

As the Iran–U.S. conflict remains deadlocked and oil prices break above $110 per barrel, the US Treasury market has experienced its worst monthly decline since October 2024. However, last Friday’s market behavior showed a notable deviation from the norm—in the context of rising oil prices and a sell-off in US stocks, Treasury yields did not rise as usual but instead fell sharply, completing a rare “logic decoupling.”

According to a Bloomberg report on the 30th, institutions including JPMorgan Asset Management and Pacific Investment Management Company (Pimco) believe that the main narrative driving the current bond selloff—that inflation shocks will force the Federal Reserve to raise interest rates—is masking a deeper risk: the combined effect of soaring energy prices and rising borrowing costs will ultimately turn into a growth shock, forcing US Treasury yields to fall. For these firms, the current high yields present a strategic opportunity.

Inflation narrative dominates the market; growth risks are underestimated

Since the US launched military strikes against Iran, traders’ focus has been almost entirely on inflation shocks. Oil prices have continued to climb, and last week, the OECD warned that US consumer prices could increase by 4.2% this year. This expectation has driven investors to demand higher yields to compensate for the erosion of real returns caused by inflation. The 30-year US Treasury yield has risen close to 5%, approaching the peak levels seen when the Fed raised rates to over twenty-year highs in 2023.

Futures market pricing also reflects this pessimism: as of last Friday, traders largely exclude the possibility of the Fed cutting rates in 2026, and have priced in about a one-third chance of a 25 basis point rate hike within the year.

However, Kelsey Berro, fixed-income portfolio manager at JPMorgan Asset Management, pointed out that the market’s focus has shifted incorrectly. “The longer the conflict persists—day by day—the closer the market gets to being forced to confront the negative impact on growth, which should ultimately push Treasury yields lower,” she said. “Overall, yields have risen to a level that is attractive.”

Pimco: Inflation shocks evolving into growth shocks

Pimco Chief Investment Officer Daniel Ivascyn is even more direct. This asset management giant, managing over $2 trillion, currently estimates the probability of a US recession within the next 12 months at over one-third.

“Inflation shocks often quickly evolve into growth shocks,” Ivascyn said. “We are at a critical juncture where the economy is weakening significantly.”

Goldman Sachs has also raised its forecast for the probability of a recession over the next 12 months to around 30%.

In the views of Pimco and JPMorgan Chase, such a pessimistic outlook is usually positive for bonds—because it increases the likelihood that the Fed will cut rates to stimulate the economy. But the current situation is unique: soaring energy prices have put the Fed in a bind. With inflation stubbornly above target, the room for rate cuts has been severely limited, which is the fundamental reason for the unusually intense bond selloff.

Furthermore, before the conflict erupted, the US economy was already showing clear signs of weakness. The labor market continued to cool: in February, employers cut 92,000 jobs, and March’s nonfarm payrolls are expected to increase only modestly by 60,000. Meanwhile, uncertainties in the artificial intelligence sector and localized pressures in the private credit market have also weighed on market sentiment. The outbreak of conflict has further intensified this fragility.

Some institutions have begun positioning, waiting for clearer signals

Despite the uncertain outlook, some institutional investors have started to act.

Columbia Threadneedle portfolio manager Ed Al-Hussainy said that as 30-year yields continue to rise, he has begun increasing holdings in long-term bonds. His reasoning is: if the Fed ultimately decides to raise rates, the resulting drag on overall demand would instead push long-term yields lower. “The more the Fed leans toward tightening, the more the long-end curve needs to price in the damage to total demand and inflation risk premiums,” he explained.

BlackRock’s head of fixed income, Rick Rieder, also stated that he believes the Fed should still cut rates to cushion the impact and is prepared to increase short-term bond purchases as the outlook becomes clearer. “Let’s see what happens over the next few weeks—and then I want to step in and buy,” he said in an interview with Bloomberg TV.

Last Friday’s unusual decline in US Treasury yields may be an early sign that this logic is beginning to be validated at the market level—within the “high oil prices, low stock prices” linkage, US Treasuries have for the first time moved independently, decoupling from the inflation narrative.