By Sunny Oh
Treasury prices rose on Friday, extending their weeklong yield plunge, following President Donald Trump’s threat to put tariffs on all Mexican goods unless they moved to curb the flow of migrants across the U.S. border.
Yields have fallen sharply over the past week and month as market participants show growing trepidation over the prospect of a global trade war, which has increased expectations for the Federal Reserve to ease policy this year.
What are Treasurys doing?
The 2-year note yield /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +0.13% , which is more sensitive to shifting Fed expectations, plunged 13.6 basis points to 1.937% to mark its biggest daily drop in a year. The short-dated maturity fell 23.8 basis points this week and 33.1 basis points for the month, marking its largest monthly drop since Nov. 2008.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +3.43% tumbled 8.9 basis points to a 20-month low of 2.139%, extending its weekly drop to 18.9 basis points and its monthly drop to 36.7 basis points. The 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +2.37% slipped 7.8 basis points to a 31-month low of 2.577%, adding to its weekly drop of 17.8 basis points and a monthly decline of 35.9 basis points. Both longer-dated maturities fell the most in a month since Jan. 2015. Debt prices move in the opposite direction of yields.
Safety-seeking investors pushed the German 10-year government bond yield /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y -0.63% down by 3 basis points to a negative 20 basis points, near a record low. The bond market for the biggest economy in the eurozone is considered a haven asset, much like U.S. government paper.
What’s driving Treasurys?
Trump announced he would place tariffs of 5% on Mexican imports on June 10, which would rise every month up to as high as 25% by Oct. 1, if Mexico failed to stem the flow of persons crossing over the U.S.’s southern border, igniting a rush out of stocks and into the perceived safety of bonds.
Adding to the trade uncertainty, China’s Commerce Ministry said it would publish a blacklist of ‘unreliable’ foreign entities. This comes soon after the U.S. Commerce Department placed Huawei Technologies and its affiliates on a blacklist over national security concerns, restricting their ability to purchase equipment and software from U.S. high-tech companies.
The Dow /zigman2/quotes/210598065/realtime DJIA +1.50% and S&P 500 /zigman2/quotes/210599714/realtime SPX +1.39% clinched their fourth straight weekly loss. The Stoxx Europe 600 index /zigman2/quotes/210599654/delayed XX:SXXP +1.58% fell 1.3%, while Japan’s Topix /zigman2/quotes/210598092/delayed JP:180460 +1.60% ended lower by 1.3%.
What did market participants say?
“What makes this round of tariffs different is that the Trump administration is using an economic policy tool as a political tool. If successful, this shift could broaden the spectrum of tariff usage significantly,” wrote Jack McIntyre, a portfolio manager at Brandywine Global.
“This latest development gives investors another reason to expect Treasury yields to decline and increases the odds that the Fed cuts rates. We’ve seen a big increase in market probabilities for rate cuts based on this latest tariff threat,” said McIntyre.
“Increasing odds of a prolonged trade war are likely to have broader ramifications for global growth. Against this backdrop, we lower our rate forecasts and expect [the 10-year Treasury yield] to end the year at 2.10%,” wrote Jorge Garayo, an interest-rate strategist at Société Générale.
What else is on investors’ radar?
In the wake of escalating trade fears, few took notice of the core personal-consumption expenditures data for April released in the morning. The Fed’s preferred inflation gauge rose 0.2% last month, in line with analysts’ expectations, after staying flat in March.
The University of Michigan’s consumer sentiment gauge fell to 100 in May, from a preliminary reading of 102.4.