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

The largest bond fund management companies on Wall Street are betting that the market is seriously underpricing the risks of a slowdown in the U.S. economy—and last Friday’s unusual drop in U.S. Treasury yields may be a signal that this logic is beginning to play out.

As the U.S.-Iran conflict remains tense and oil prices surpass $110 per barrel, the bond market has experienced its worst monthly decline since October 2024. However, last Friday, the market’s performance deviated significantly—against a backdrop of rising oil prices and a sell-off in U.S. stocks, Treasury yields did not rise as usual; instead, they saw a notable decline, completing a rare decoupling of logic.

According to a report by Bloomberg on the 30th, institutions such as J.P. Morgan Asset Management and Pacific Investment Management Company (Pimco) believe that the core narrative driving the current bond market sell-off—that inflationary shocks will force the Federal Reserve to raise interest rates—is obscuring a deeper risk: the combined effect of soaring energy prices and rising borrowing costs will ultimately evolve into a growth shock, at which point Treasury yields will be forced to decline. For these institutions, the current high yields present a strategic opportunity.

Inflation narrative dominates the market, growth risks underestimated

Since the U.S. launched military strikes against Iran, traders’ attention has been almost entirely focused on inflationary shocks. With oil prices continuing to rise, the OECD warned last week that U.S. consumer prices could increase by 4.2% this year. This expectation has driven investors to demand higher yield compensation to counteract inflation’s erosion of real returns, with the 30-year Treasury yield climbing to nearly 5%, approaching the peak level when the Federal Reserve raised rates to over a 20-year high in 2023.

Futures market pricing also reflects this pessimistic outlook: as of last Friday, traders had virtually ruled out the possibility of the Federal Reserve cutting rates in 2026 and priced in about a one-third probability of a 25 basis point rate hike this year.

However, Kelsey Berro, a fixed-income portfolio manager at J.P. Morgan Asset Management, pointed out that the market focus has shifted. “With each passing day of conflict, the market is one step closer to being forced to confront the negative impacts on growth, and this should ultimately push Treasury yields lower,” she said, “the overall yields have risen to attractive levels.”

Pimco: Inflation shock evolving into growth shock

Pimco’s Chief Investment Officer Daniel Ivascyn’s assessment is more direct. This asset management giant, which manages over $2 trillion in assets, currently estimates the probability of a U.S. recession in the next 12 months to be above one-third.

“Inflation shocks often quickly evolve into growth shocks,” Ivascyn stated, “we are at a critical point where the economy is significantly weakening.”

Goldman Sachs has also raised its estimate of the probability of economic recession in the next 12 months to about 30%.

From the perspective of Pimco and J.P. Morgan, this pessimistic outlook generally bodes well for bonds—because it increases the likelihood of the Federal Reserve cutting rates to stimulate the economy. However, the current unique situation is that soaring energy prices have put the Federal Reserve in a dilemma: with inflation stubbornly above its target, the room for rate cuts is severely constrained, which is the fundamental reason for the unusually fierce sell-off in the bond market this round.

Moreover, before the outbreak of the conflict, signs of a clear economic slowdown were already evident in the U.S. The labor market continued to cool, with employers cutting 92,000 jobs in February, and March’s non-farm payroll data is expected to show only a slight rebound to an increase of 60,000 jobs. Meanwhile, uncertainties in the field of artificial intelligence and localized pressures in the private credit market have also weighed on market sentiment. The outbreak of conflict has further exacerbated this vulnerability.

Some institutions have begun to position themselves, waiting for clarity

Despite the uncertain outlook, some institutional investors have begun to take action.

Columbia Threadneedle portfolio manager Ed Al-Hussainy stated that as the 30-year yield continues to rise, he has started to increase his holdings in long-term bonds. His logic is: if the Federal Reserve ultimately chooses to raise rates, the pressure on overall economic demand will instead lower long-end yields. “The more the Federal Reserve leans toward tightening policy, the more the long-end curve needs to price in the damage to total demand and inflation premium,” he said.

BlackRock’s head of fixed income Rick Rieder also stated that he believes the Federal Reserve should still cut rates to buffer the shock and is prepared to increase his buying of short-term bonds as the outlook becomes clearer. “Let’s see what happens in the coming weeks—then I want to step in and buy,” he said in an interview with Bloomberg Television.

Last Friday’s unusual drop in Treasury yields may be an early signal that this logic is beginning to be validated on the market level—amid the “high oil prices, low stock market” linkage pattern, U.S. Treasuries have finally charted an independent course, decoupling from the inflation narrative.

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