Bond Market Breathes a Sigh of Relief as Trump’s Tariff Threats Ease
After a tumultuous week, the US government bond market has finally found some stability, thanks to President Donald Trump’s decision to take a more measured approach to imposing tariffs. The yield on 10-year government bonds has steadied at 4.57%, down from a high of 4.81% last week.
A Reprieve from Trade War Fears
The bulk of the bond market’s rally can be attributed to softer US inflation data, but Trump’s decision not to impose immediate tariffs has also helped to ease concerns over a potential trade war. According to Mark Nash, an investment manager at Jupiter Asset Management, “You’ve seen the long-end of the bond market scream back lower, which makes complete sense.” Nash started buying 30-year US Treasuries before the inauguration, anticipating a more cautious approach from the new administration.
Tariff Threats Widen, But Action Remains Limited
While Trump has expanded his tariff threats to China and the European Union, actual action has been limited to a review of trade practices by April 1. This gives trading partners nearly 10 weeks to address his demands or avert new duties. As Kathleen Brooks, research director at XTB, notes, “Investors may decide Trump’s bark is worse than his bite when it comes to tariffs.”
Inflation Expectations Ease
Measures of expected inflation, including breakeven rates and swaps, have fallen, while a gauge of future volatility in rates markets has dropped from a seven-week high. This is partly due to Trump’s efforts to lower energy prices by maximizing domestic oil and gas production, which should help contain domestic inflation in the US.
Volatility Ahead
Despite the current reprieve, further price swings can be expected as Trump refines his tariff policies. Justin Onuekwusi, chief investment officer at St James’s Place, is waiting for more extreme moves to add to his position in US Treasuries. “It is very early days, and the rhetoric hasn’t stopped,” he said.
Currency Markets React
The Bloomberg dollar index has erased its earlier gains, dropping 0.2% by 11:30 a.m. London time. The greenback is now down against every Group-of-10 currency year-to-date except the pound. European yields have also retreated despite heavy issuance, with the UK and France both drawing record orders for bond sales on Tuesday and Spain set to do the same.
Treasury Sales Ahead
The US Treasury will sell $13 billion of 20-year bonds later on Wednesday, which could impact the market’s trajectory. As Michael Leister, head of interest rates strategy at Commerzbank, notes, “Markets seem comfortable. Neither Trump nor the supply wave are delivering surprises relative to what had been priced in before.”
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