(Jan 21): Treasuries rallied as fears that Donald Trump’s policies will fuel inflation eased, after the US president refrained from imposing China-specific tariffs for now.
The 10-year US yield fell as much as 10 basis points to 4.53% on Tuesday, as the market reopened after a US holiday. Meanwhile, the dollar rallied as Trump said he still plans to impose 25% tariffs on Mexico and Canada from next month, which sent currencies from both countries tumbling over 1%.
The volatility in markets is a glimpse of the months to come as the new administration changes policies at speed. Running up to the inauguration, US bonds sold off aggressively on fears sweeping tariffs and tax cuts would drive up US inflation, while reports on Trump’s intended policies triggered wild swings in assets worldwide.
“We expect further declines in Treasury yields,” said Mark Haefele, the chief investment officer of UBS Global Wealth Management, who sees 10-year yields at 4% by mid-2025. He added that tariffs will not prevent inflation from continuing to fall, setting the Federal Reserve (Fed) up to cut rates by half a point this year.
The rally in US bonds on Tuesday was also supported by falling crude prices after Trump revoked offshore oil and gas leasing bans that effectively blocked drilling in most US coastal waters. Investors reacted by slightly adding to wagers on Fed policy easing, with overnight-indexed swaps signalling a 52% chance of more than one rate cut this year, up from 46% last Friday.
“Markets were fixated on big tariffs bazookas from day one,” said Shoki Omori, the chief global desk strategist of Mizuho Securities. “The absence of that, especially on China, is driving a relief rally for Treasuries.”
Still, market participants including ING and Nomura see Tuesday’s rally as only a temporary respite from the march higher in yields. Treasuries lost 3.1% in the final three months of 2024, the worst quarterly performance in two years.
“We still argue for higher US rates from a structural perspective,” wrote ING rates strategists including Michiel Tukker in a note. “Plenty of Trump’s intended policy measures are inflationary, and failing to address the growing deficit adds to the upward pressure for US Treasury yields.”
In currency markets, the fact Trump pressed on with tariffs on Mexico and Canada was enough to keep boosting the dollar, showing how traders will need to pay attention to the nuance of Trump’s headline policies.
A Bloomberg gauge of the greenback rose as much as 0.7% and all Group-of-10 currencies fell, reversing the index’s steepest drop in 14 months seen on Monday.
The tariffs announcement also led some hedge funds to re-enter bullish dollar option trades on Tuesday, having exited similar positions just hours earlier.
“Welcome to the roller-coaster,” said Kit Juckes, the chief foreign exchange strategist at Societe Generale, who sees the dollar remaining strong, though he warned the high plain will be “bumpy” territory.
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