US Treasuries bottoming out? JPMorgan and Pimco: "Bond market sell-off" underestimates "recession risk"

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Several of Wall Street's largest bond fund management companies are betting that the market is severely underpricing the risks of a U.S. economic slowdown—and the unusual pullback in U.S. Treasury yields last Friday may signal the beginning of this logic playing out.

As the US-Iran conflict drags on and oil prices break above $110 per barrel, the US Treasury market has suffered its worst monthly drop since October 2024. However, last Friday saw a significant deviation in market trends—despite continued oil price surges and US stocks being sold off, Treasury yields did not rise as usual, but instead pulled back sharply, marking a rare break in typical market logic.

According to a Bloomberg report on the 30th, institutions such as JP Morgan Asset Management and Pacific Investment Management Company (Pimco) believe that the current core narrative driving the bond selloff—that inflation shocks will force the Fed to raise rates—is obscuring a deeper risk: the combined effects of soaring energy prices and rising borrowing costs will eventually evolve into a growth shock, at which point Treasury yields will be forced down. For these institutions, the current high yields represent an opportunity to deploy strategies.

Inflation Narrative Dominates the Market, Growth Risk Underestimated

Since the US launched military strikes against Iran, traders' attention has focused almost exclusively on the risk of inflation shocks. As oil prices continue to rise, the OECD warned last week that U.S. consumer prices could climb 4.2% this year. This expectation has prompted investors to demand higher yields as compensation against inflation's erosion of real returns, with 30-year Treasury yields nearly hitting 5%, approaching peaks last seen when the Fed raised rates to more than two-decade highs in 2023.

Futures market pricing reflects this pessimism as well: as of last Friday, traders had largely ruled out any rate cut by the Fed in 2026, and priced in about a one-third probability of a 25-basis-point rate hike this year.

However, Kelsey Berro, fixed income portfolio manager at JP Morgan Asset Management, pointed out that the market's focus is misplaced. "With each passing day of conflict, the market is forced one step closer to recognizing negative growth impacts, which should ultimately drive Treasury yields lower," she said. "Overall yields have already risen to attractive levels."

Pimco: Inflation Shock Evolving Into Growth Shock

Pimco CIO Daniel Ivascyn is even more direct. The asset management giant, which manages over $2 trillion, currently estimates the probability of a U.S. recession in the next 12 months at over one-third.

"Inflation shocks often rapidly evolve into growth shocks," Ivascyn said. "We're at a critical point where the economy could weaken significantly."

Goldman Sachs has also raised the probability of a recession in the next 12 months to around 30%.

In the views of Pimco and JP Morgan, this pessimistic outlook usually benefits bonds—because it increases the likelihood that the Fed will cut rates to stimulate the economy. What's special about the current situation, however, is that soaring energy prices put the Fed in a bind: with inflation still stubbornly above target, there's little room for rate cuts, which is fundamentally why this bond market selloff has been so severe.

Additionally, even before the conflict broke out, the U.S. economy was already showing signs of weakness. The labor market continues to cool, with employers cutting 92,000 jobs in February, and March's nonfarm payrolls expected to rebound only slightly to 60,000 new jobs. At the same time, uncertainty in the AI sector and localized pressure in private credit markets continue to weigh on sentiment. The outbreak of conflict has further heightened this fragility.

Some Institutions Already Positioning, Waiting for Clearer Timing

Although the outlook remains unclear, some institutional investors have begun to act.

Columbia Threadneedle portfolio manager Ed Al-Hussainy says that as the 30-year yield continues to rise, he has begun increasing holdings of long-term bonds. His logic: if the Fed ultimately chooses to raise rates, the hit to aggregate demand will actually push down long-term yields. "The more the Fed leans toward tightening policy, the more the long end of the curve needs to price in damage to aggregate demand and inflation risk premia," he said.

Rick Rieder, Head of Global Fixed Income at BlackRock, similarly said he believes the Fed should still cut rates to buffer the shock, and he is ready to increase buying of short-term bonds as the outlook becomes clearer. "Let's see what happens over the next few weeks—then I want to get in and buy," he told Bloomberg TV.

Last Friday's unusual pullback in Treasury yields may be an early signal that this logic is starting to play out in the market—with the combination of "high oil prices, low stocks," Treasuries have, for the first time, decoupled from the inflation narrative and moved independently.

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