Shell-shocked investors are stampeding into US Treasuries, desperate for shelter from the economic whirlwind unleashed by President Donald Trump’s latest round of tariff diplomacy. This crusade threatens to shove the global economy into recession while, quite conveniently, sowing the seeds of another inflationary surge. But for now, markets appear far more concerned with growth going missing than prices going rogue.

The two-year yield has plunged to levels not seen since 2022, with traders not-so-subtly hinting that the Federal Reserve might need to abandon its inflation fight and instead roll out the stimulus carpet. Markets are laser-focused on collapsing demand, ignoring Chair Powell’s not-so-subtle warning that tariffs could reignite inflation. The Fed may soon find itself in the unenviable position of being forced to cut rates as growth stalls—just as prices start climbing again.

Ah yes, stagflation: that charming economic paradox where nothing grows except your grocery bill. On Friday, Powell admitted that tariffs may complicate monetary policy—an understatement on par with saying the Titanic had navigational issues. “Tariffs are very likely to generate at least a temporary increase in inflation,” he said while reiterating that the Fed is in no rush to adjust rates—though markets have their own ideas, now pricing in nearly four cuts by year-end.

Since Trump’s White House rose garden reality check, investors have flocked to bonds with the enthusiasm of lifeboat-seekers. Ten-year yields dropped below 4% for the first time since October, and the two-year yield is flirting with 3.5%, its lowest in over 18 months. Meanwhile, traders are placing long odds on an economic soft landing—while entirely forgetting that rising tariffs tend to light a fire under prices.

The Fed, already walking the tightrope between inflation control and recession avoidance, now finds that tightrope set ablaze. The longer they wait, the more catching up they’ll have to do.
Yet amidst the rally in bonds, a shadow looms: what if foreign buyers, particularly China and Japan—the two largest holders of US sovereign debt—decide they’ve had quite enough of funding Washington’s chaos? After all, both have already trimmed their holdings. Some whisper retaliation, others suggest simple prudence, but either way, Treasuries may not be the automatic safe haven they once were.

One thing’s certain: Trump’s tariff bazooka has blown a hole in global market assumptions. Whether the fallout looks more like recession, inflation—or that delightful cocktail called stagflation—remains to be seen. But for now, investors are hedging with bonds and hoping the Fed can work miracles. No pressure, Mr Powell.