Some of Wall Street's largest bond fund managers are betting that the market is severely underpricing the risk of an economic slowdown in the United States—and the unusual retreat in US Treasury yields last Friday may be the first signal that this logic is beginning to play out.
As the US-Iran conflict continues to be deadlocked and oil prices surpass $110 per barrel, the US Treasury market has suffered its worst monthly decline since October 2024. However, market movements last Friday showed a significant deviation—against the backdrop of rising oil prices and a sell-off in US stocks, US Treasury yields did not climb as usual. Instead, they fell noticeably, achieving a rare logical decoupling.
According to Bloomberg on the 30th, institutions such as JPMorgan Asset Management and Pacific Investment Management Company (Pimco) believe that the core narrative of the current bond market sell-off—that inflation 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 US Treasury yields will be forced to fall. For these institutions, the current high yields precisely present an opportunity for positioning.
<h2>Inflation Narrative Dominates Market, Growth Risks Underestimated</h2>
Since the United States launched military strikes against Iran, traders' attention has been almost entirely focused on inflation shocks. Oil prices have continued to rise, and the OECD warned last week that US consumer prices could increase by 4.2% this year. This expectation has driven investors to demand higher yield compensation to hedge against the erosion of real returns by inflation. The 30-year US Treasury yield has climbed to near the 5% mark, approaching the peak levels seen in 2023 when the Federal Reserve pushed interest rates to their highest in over two decades.
Pricing in the futures market also reflects this pessimistic outlook: as of last Friday, traders had largely ruled out the possibility of the Federal Reserve cutting interest rates in 2026 and priced in about a one-third probability of a 25 basis point rate hike within the year.
However, Kelsey Berro, a fixed income portfolio manager at JPMorgan Asset Management, pointed out that the market's focus has shifted. **&#34;The longer the conflict persists, the closer the market gets to being forced to confront the negative impact on growth, which should ultimately drive US Treasury yields lower,&#34; she said. &#34;Overall yields have risen to attractive levels.&#34;
<h2>Pimco: Inflation Shock Evolving into Growth Shock</h2>
Pimco Chief Investment Officer Daniel Ivascyn's assessment is more direct. The asset management giant, which manages over $2 trillion in assets, currently estimates the probability of a US recession in the next 12 months at over one-third.
**&#34;Inflation shocks often quickly evolve into growth shocks,&#34; Ivascyn stated. &#34;We are at a critical juncture of significant economic weakening.&#34;
Goldman Sachs has also raised its probability estimate for an economic recession in the next 12 months to approximately 30%.
According to Pimco and JPMorgan, such pessimistic expectations usually favor bonds—as they increase the likelihood of the Federal Reserve cutting interest rates to stimulate the economy. However, what is special about the current situation is that soaring energy prices have put the Federal Reserve in a dilemma: with inflation already stubbornly above target, the room for rate cuts is severely compressed, which is the fundamental reason for the unusually fierce bond market sell-off.
Furthermore, before the conflict erupted, the US economy was already showing clear signs of weakness. The labor market continued to cool, with employers laying off 92,000 people in February, and non-farm payroll data for March is expected to show only a slight rebound to 60,000 new jobs. Meanwhile, uncertainties in the artificial intelligence sector and localized pressures in the private credit market have also weighed on market sentiment. The outbreak of the conflict has further exacerbated this fragility.
<h2>Some Institutions Have Begun Positioning, Awaiting Clarity</h2>
Despite the lingering uncertainty, some institutional investors have started to act.
Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, stated that as the 30-year yield continues to rise, he has begun increasing his holdings of long-term bonds. His logic is that if the Federal Reserve ultimately chooses to raise interest rates, the suppression of aggregate demand will, in turn, drive down long-term yields. &#34;The more the Fed leans towards tightening policy, the more the long end of the curve needs to price in the damage to aggregate demand and inflation premiums,&#34; he said.
Rick Rieder, BlackRock's chief investment officer for fixed income, similarly believes that the Federal Reserve should still cut interest rates to cushion the impact and is ready to increase his purchases of short-term bonds as the outlook becomes clearer. &#34;We'll see what happens in the next few weeks—then I think we'll step in and buy,&#34; he said in an interview with Bloomberg Television.
The unusual retreat in US Treasury yields last Friday may be an early signal that this logic is beginning to be validated at the market level—in the context of the &#34;high oil prices, low stock market&#34; linkage, US Treasuries have for the first time forged an independent path, decoupling from the inflation narrative.

Institutions like JPMorgan Chase and Pimco believe that the current "inflation panic" in the bond market is overshadowing deeper growth risks. The combination of soaring oil prices and high borrowing costs will ultimately lead to a recessionary shock, forcing US Treasury yields to fall. Last Friday, US Treasuries unexpectedly strengthened amidst "rising oil prices and falling US stocks," perhaps signaling the first realization of this logic

- Major bond fund managers are betting that the market is underestimating risks of a U.S. economic slowdown, as indicated by a recent unusual drop in U.S. Treasury yields.  
- Despite high inflation pressures leading to increased yields, firms like JPMorgan and Pimco warn that rising energy costs combined with high borrowing expenses may result in slower growth, presenting a buying opportunity in bonds.  
- Some investors have begun to increase their holdings in long-term bonds, anticipating that the Federal Reserve may need to lower rates in response to economic demand impacts despite current inflation challenges.

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US Treasuries Bottoming Out? JPMorgan, Pimco: "Bond Sell-Off" Underestimates "Recession Risk"