Risk-Off Sentiment Strengthens Slide In Treasury Yields

Maybe it’s a reaction to the recent escalation in the US-China trade conflict. Or perhaps the crowd is turning more cautious because of the runup in global equity markets earlier in 2019 before the trade row between Washington and Beijing undercut the bulls. Whatever the reason, yields on key Treasury maturities are trending down and the slide looks set to continue for the foreseeable future.

“We really need to get past trade negotiations, if we want to know what the next steps are for the Treasuries market,” says Subadra Rajappa, head of US rates strategy at Société Générale. “At the moment, the [Treasury] market is still priced to perfection given the current state of trade discussions.”

Bidding up Treasury prices (and thereby pushing yields down) is everyone’s favorite trade when the economic or geopolitical outlook looks more uncertain than usual. By that standard, it’s no surprise that the latest turmoil over trade between the planet’s two largest economies has investors running for cover by hiding in the safe haven of US government bonds.

A resolution to the trade issue would likely halt or even reverse Treasury yields. But at the moment, there’s no sign that the Trump administration is about to relent on its latest efforts to take a hard line on China’s trade policies. In fact, it’s no unreasonable to wonder if the situation could deteriorate further.

“An escalation scenario would be terrible all around,” advises Gabriel Sterne, head of global macro research at Oxford Economics. “A negative impact on trade flow is going to be bad for global growth for several years. It’s bad news for almost everybody.”

By some accounts, the higher tariffs imposed by the Trump administration are less about a negotiating tool vs. a goal. Douglas Irwin, a trade historian at Dartmouth College, tells The New York Times that raising tariffs is Trump’s plan for “a new status quo for the world economy.”

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