Here's why bond yields are down and why the rout will not end any time soon

The bond market has long been hovering over a period of low interest rates and how low they could be down to President Donald Trump.

The president, who was calling for Fed rate cuts, could realize his wish after his threat of Mexican tariffs prompted a number of Wall Street economists to now predict two Fed rate cuts this year. , after not waiting until last Thursday. Economists point to slowing economic data, reduced corporate spending and uncertainty about the impact of tariffs on the economy.

Treasury yields have fallen over the past month as investors fear that the US-China trade war will spread and result in greater economic damage. But it was Trump's threat to impose tariffs on all Mexican exports unless his government severely punished immigrants, which abruptly changed Wall Street's view on rates. of interest and on the Fed last Thursday.

"The badumption that the coldest heads would prevail has been ruled out … that may be the case, but it seems like the president is quite willing to go ahead with higher rates, "said Mark Cabana, US manager. Short-term strategy at Bank of America Merrill Lynch. "He does not see this as a bad outcome or at least not as bad as the rate market does."

Bond professionals believe the widely observed 10-year yield could easily drop to 2% or below, after hitting 2.06% on Monday, and JP Morgan Chase's strategists say their target is now 1.75%. % for the end of the year. This forecast was announced while a number of Wall Street companies, including J.P. Morgan and Barclays, have changed their minds twice this year without any reduction.

As a reminder, the 10-year yield was 2.55% at the beginning of May and, at the beginning of the year, many strategists thought that the Fed would raise interest rates this year and above 3 %. Returns fluctuate in opposite prices, and the 10-year yield is largely monitored because it is badociated with lending rates, especially mortgage loans.

Jim Caron, portfolio manager at Morgan Stanley Investment Management, said he foresaw that the increased uncertainty would come back to below 2%, but not significantly, as he does not expect a recession. But, like others, he said the bond market now reflects a much slower growth environment than some forecasts.

"1.85 / 1.90 seems reasonable to me, there are no magic numbers here, it's really a question of whether you are reducing growth, inflation expectations, expectations of your Fed and risk premiums, all for high quality income, so prices go up, "he said.

The strategists said that the fact that Mexican tariffs are not linked to trade problems makes them even more uncertain and risky.

"This shows that he sees this as a tool that can be used for broader political purposes, and you can have a trade agreement in place, and he will always feel that it's appropriate to proceed with a punctual adjustment of the uncontrolled tariff policy on the grounds that it uses these tariffs, "Cabana said. Policymakers said the three-way trade deal between the US, Canada, and Mexico was now even more likely to never be approved.

Caron said that Mexican rates were injecting the market with a level of uncertainty that will be difficult to repair, even if rates are never regularized. "At the end of the day, it's hard to be an investor because I'm looking at things outside the market now, making an informed economic decision, which makes things very difficult.[and] why you become more defensive. You are collecting more money and you are starting to become more defensive, "said Caron.

Mohamed El-Erian, chief economic advisor at Allianz, told CNBC that the volatility of the bond market was higher than that of the stock market. He said it was because the market was anticipating a period of unusual uncertainty.

"I think this means a more vulnerable economic outlook, more fragile market techniques and a higher risk of returning troubled markets to the economy.These prospects are different from those of last week.", And see if we can go back to where we were before, "El-Erian said.

Michael Schumacher, director of strategy at Wells Fargo, said market professionals are now watching Fed speakers for advice. Fed President Jerome Powell will speak on Tuesday and Fed Vice President Richard Clarida will appear on CNBC.

St. Louis Fed President James Bullard said on Monday that a rate cut could be "justified soon" as yields on stocks are down slightly.

"The bond market has become much more nervous last week, providing for a 57 basis point easing this year," said Schumacher, referring to federal fund futures. The Fed meets on June 18 but should not act.

"You arrive at the end of July and there are not many meetings left, they would be better off quickly if they want to justify this market call," he said, adding that he was not going to Was not expecting a reduction in rates. Schumacher also does not expect the 10 year period to fall below 2%.

While yields continued to fall on Monday, stocks fell, the Dow and S & P 500 indexes fell slightly, and the Nasdaq lost more than 1.7% due to the fall in FANG names.

"It seems that the bond market has become more nervous about equities last week … If Trump were to help the stock market and stocks rose quickly by 3 or 4%, that would be about 10 to 15% points over 10 years, "he said." This could happen at any time. It's an unpredictable type. "