US Treasury yields popped following news that Washington and Beijing will agree to a 90 day downtime on tariffs. Yet this friendly agreement stirred hope in the markets. Traders’ expectations for Federal Reserve rate cuts to come in 2024 have changed completely. This announcement follows the surprise development and last week’s Consumer Price Index (CPI) inflation data. In this context, yields on US securities rose throughout the yield curve. This boom is indicative of positive market responses to bilateral and multilateral free trade agreements and improving domestic economic indicators.
The yield on the US 10-year Treasury note rose over two basis points to 4.495%. This increase is a big deal. This represents a new high water mark, given that the yield previously traded in a range of 4.75% to 5.00%, with 5.00% being the upper limit. At the same time, the 10-year note’s real yield jumped three basis points to 2.21%. Along with this upward trajectory in yields, the latest move marks a significant change in sentiment among bond traders.
Impact of Trade Developments
And just like that, the United States and China had agreed to a 90-day truce on tariffs. This decision has been central to the recent spike in yields. Right now, Washington has raised tariffs on Chinese imports by 30%, while raising tariffs on American goods going into China only 10%. The temporary halt in tariff increases suggests a potential easing of tensions in trade relations, which could lead to more stable economic conditions.
Economists and market analysts alike pointed out that this latest measure is already having the effect of decreasing bets on Federal Reserve rate cuts. Before the trade truce, markets were looking for a minimum cut of 76 basis points. Now, that number has decreased to 52 bps. An increased confidence in stability is reflected by lowering expectations for rate cuts. That change is especially motivated by somewhat surprising, robust inflation data that has recently come out.
Inflation Data Analysis
The US inflation pressures visible in the last nine months were equally important in driving the market’s perception. The publication of April’s CPI data showed a 0.2% month-over-month increase, after a -0.1% decrease in March. Year-on-year, CPI increased 2.3%, a tick below expectations and below March’s 2.4%. That would be very reassuring, indicating that inflationary pressures are stabilizing. That’s central banks’ number one worry right now, after all.
Core CPI, which strips out volatile food and energy prices, was flat from March, up 2.8% year-on-year. On a month-over-month basis, core CPI grew by 0.2%, an increase from the 0.1% seen last month. The numbers almost perfectly align to the Federal Reserve’s desired inflation rate of roughly 2%. This points to signs of inflation continuing on a more sustainable track.
Market Reactions and Future Outlook
The bond market fallout from all of these developments foreshadows much more alarming investor sentiment. US yields shot up across the curve as traders displayed greater confidence in the economy and the prospect of ‘soft landing’ stabilizing in the backdrop. Most importantly, this trend reflects that investors are recalibrating their expectations to a new normal for future monetary policy. They’re responding to recent economic data and unfolding geopolitical events.
The consensus among economists is that central banks will remain hyper-alert to inflationary pressures for the foreseeable future. With tariffs on hold, a new door has opened for stronger economic prosperity. This change would open the door for improved US-China trading relations. Even if these dynamics continue to move in the right direction, they would not yet warrant any plans to lower interest rates. This would be preferable to going after draconian cuts.