Ten-year Treasury yields plunged to the lowest since 2016 as U.S. President Donald Trump said he would slap a 10% tariff on $300 billion in Chinese imports, and as traders slashed their inflation outlook.
The prospect of escalating trade tension between the U.S. and China added to investors’ doubts that the Federal Reserve’s quarter-point rate cut and forward guidance Wednesday would be sufficient to bolster inflation pressures. Futures show traders now expect more than 50 basis points of additional Fed easing this year.
The tariff developments took on added meaning, coming the day after Fed Chairman Jerome Powell cited trade tensions, weakening global growth and too low inflation as justification for Wednesday’s decision. Helping fuel the bond rally, a report showing U.S. manufacturing activity deteriorating also dimmed the growth picture.
“It means the first of Powell’s three items just went from simmer to boil,” said John Briggs, head of strategy for the Americas at NatWest. “He probably regrets not leaving the door more open to future cuts ‘if necessary.’”
The 10-year Treasury yield dropped as much as 14 basis points to 1.88%, the lowest since November 2016. The 10-year breakeven rate -- which reflects ’ expectations for annual gains in consumer prices -- fell as low as 1.69%, from Wednesday’s high of 1.79%. It hasn’t been above 2% -- the Fed’s inflation target -- since late last year.
“The Fed cited breakeven inflation rates as one of their core justifications for cutting rates in the first place,” said Jon Hill, a rates strategist at BMO Capital Markets “It’s hard for the 10-year yield to stay above 2% in a world where inflation expectations are falling pretty fast.”
Interest-rate volatility rose amid the plunge in Treasury yields. The benchmark gauge of three-month options on 10-year interest-rate swaps rose 1.5 basis points to 58.7 basis points.
The moves in Treasuries reverberated across global bond markets in Asia trading on Friday. Australia’s 10-year yield slid to a new all-time low of 1.076% while Japan’s 10-year yield opened 3 basis points down. German bond futures imply that 10-year yields will start at a new record low.
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