(Bloomberg) -- US government bonds gave back some of the past week’s steep gains, most recently spurred by bets that US President Donald Trump would take a more measured approach on tariffs, as an auction of 20-year bonds put Treasury supply back in focus.
The declines pushed yields slightly higher across the curve on Wednesday, with the 10-year’s up 3.5 basis points to 4.61%, compared to 4.81% as recently as last week. Yields across the US curve have retreated after a reading of softer US inflation data and Trump’s decision not to immediately impose import levies eased concerns of a trade war that could reignite price pressures.
“You’ve seen the long-end of the bond market scream back lower, which makes complete sense,” said Mark Nash, an investment manager at Jupiter Asset Management, who started buying 30-year US Treasuries before the inauguration.
While the US president has widened his tariff threats to China and the European Union on top of Mexico and Canada, the only actual action he’s taken so far was to call for a review of trade practices by April 1. That potentially gives trading partners almost 10 weeks to avert new duties or address his demands.
Investors may decide “Trump’s bark is worse than his bite when it comes to tariffs,” said Kathleen Brooks, research director at XTB. “The EU may also be hopeful that they could see a ‘tariff light’ approach from the US.”
Trump’s latest threat of 10% taxes on Chinese exports is far lower than the 60% he mulled at one point last year. As a result, measures of expected inflation including breakeven rates and swaps have fallen, while a gauge of future volatility in rates markets dropped from a seven-week high.
That move has been boosted by the president’s attempt to lower energy prices by maximizing domestic oil and gas production to ease pressure on US households. The consumer price index remained above the Federal Reserve’s official target at 2.9% in December, though a measure stripping out food and energy eased.
“It’ll help contain domestic inflation in the US,” Nash said. “They are cautious on pushing up the cost of living because their voters will be very angry about that.”
Still, further price swings can be expected as Trump hones his tariff policies. Justin Onuekwusi, chief investment officer at St James’s Place, increased his position in US Treasuries last year and is waiting for more extreme moves to add further.
“It is very early days and the rhetoric hasn’t stopped,” he said. “We have not seen the end of this and therefore you are going to continue to see more UST volatility.”
What Bloomberg strategists say...
“After having sold the rumor on bigger and sooner levies headed into President Donald Trump’s inauguration, rates are likely to remain confined to a range until an official tariff announcement is made.”
— Alyce Andres, US Rates/FX Strategist
Ahead of the Fed’s policy meeting next week, traders are fully pricing in just one quarter-point interest-rate reduction this year — and likely in the second half.
But even as yields ticked higher, a $13 billion sale of 20-year bonds drew a yield roughly one basis point below the level seen immediately prior to the auction, signaling strong investor appetite. The UK, France and Spain, meanwhile, drew record orders for bond sales this week.
Trump Widens Tariff Threats to China, Europe on Day 2 in Office
“Markets seem comfortable,” said Michael Leister, head of interest rates strategy at Commerzbank. “Neither Trump nor the supply wave are delivering surprises relative to what had been priced in before.”
--With assistance from Greg Ritchie, James Hirai, Sujata Rao, Liz Capo McCormick and William Selway.
(Updates yields.)
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