Treasuries Climb After Trump Threatens Higher Tariffs on China
(Bloomberg) -- Treasuries rallied on Friday, pushing yields to the lowest in weeks, after US President Donald Trump threatened “a massive increase” in tariffs on Chinese imports, sparking declines in stocks and some commodities.
Yields across maturities fell at least seven basis points to the lowest levels since mid-September after Trump’s comment in a social-media post. The rates were already several basis points lower on the day as investors reacted to evidence the US government shutdown may be curtailing economic activity.
The tariff threat and the market reaction to it hearkened back to US financial-market behavior in April, when the Trump administration rolled out an agenda of sweeping levies that sent the stock market into a tailspin, stoking demand for Treasuries. The administration subsequently placed many of its plans on hold, and shares soared in the following months.
“The immediate flight to safety makes sense,” said Dan Carter, portfolio manager at Fort Washington Investment Advisors. “Thawing of trade tensions was the narrative recently, so this was a surprise.”
The US president’s post followed moves by both the US and China to potentially curb flows of technology and materials between the countries. Trump’s threat also impacted the currency market, with the dollar slipping and the yen, often seen as a haven, climbing.
What Bloomberg Strategists Say...
“Markets had begun to unwind policy risk in the last few months. As that starts getting added back, the yield curve will likely steepen in coming days. Trump’s latest remarks serve as a reminder that he has a tendency to say and do unpredictable things, and that should translate to a higher risk premium in the bond market.”
— Sebastian Boyd, Macro Strategist, Markets Live.
For the full analysis, click here.
“Markets had anticipated an improvement in US-China relations amid expectations of a meeting” between Trump and Chinese leader Xi Jinping, said Ryan Grabinski, director of investment strategy and quantitative research at Strategas Asset Management LLC. Instead there’s been “a re-escalation of tensions.”
Shutdown Role
Meanwhile, the US federal shutdown is expected to deprive another 2 million federal employees of paychecks next week, on top of more than a quarter million that weren’t paid this week. On Friday, the administration announced it had begun firing federal employees.
The overall impact “is playing a key role in the anticipation of a weakening economic outlook,” said Tom di Galoma, managing director at Mischler Financial Group. “The bottom line is this could go on for a while.”
While the standoff in Washington has delayed the release of federally compiled statistics, economists at Citigroup Inc. and Goldman Sachs Group Inc. said state-level data suggested initial jobless claims increased last week.
That supports expectations that the Federal Reserve will cut interest rates for the second time this year on Oct. 29 despite inflation still exceeding the central bank’s long-term target. Fed Governor Christopher Waller, speaking on CNBC Friday, said he supported two more rate cuts this year based on labor-market weakness.
“For rates, we view the path of least resistance as lower, driven by continued Fed easing and weakening of the labor market,” said Zachary Griffiths, head of investment-grade credit and macro strategy at CreditSights. “The inflation picture remains murky, so it will likely be a bumpy road,” however “we would not necessarily look to fade the rally in Treasuries here.”
The rally had additional catalysts, including gains for the UK and French government-bond markets, a drop in the price of crude oil to the lowest level in several months, and a supportive supply backdrop. Strong investor demand for Thursday’s 30-year bond auction left Wall Street dealers with a record-low share, and there are no note or bond auctions until Oct. 22.
Before Trump’s tariffs threat, yields briefly stabilized when the October preliminary University of Michigan sentiment gauge declined less than economists estimated.
Treasury trading will be suspended Monday with US banks closed for Columbus Day, however CME Group Inc.’s listed interest-rate futures contracts will be on a regular schedule along with US stocks.
(Adds comments in sixth and 11th paragraphs, federal layoffs in seventh paragraph.)
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