Don’t expect an end to the tariff standoff between the U.S. and Mexico to undo the plunge in U.S. Treasury yields this year.
Monday’s bond selloff is only traders taking a breather from the Treasury market’s relentless rally in the past few weeks, and was unlikely to dent the widely-shared bullishness among debt investors, BMO Capital Market’s Ian Lyngen said.
Economic uncertainty, the chief engine of the slide in government bond yields in recent weeks, would continue to shadow the U.S. as it contends with an ongoing trade dispute with China and worrying signs of weakness in a historically tight labor market, he argued.
“We’re not anticipating a durable selloff on this weekend’s positive trade headlines, rather a period of consolidation that will contribute to the longevity of the recent repricing to a lower rate environment,” said Lyngen, head of interest-rates strategy for BMO, in a research note.
At first glance, the bond-market reeled as President Donald Trump’s deal waved away the cloud of uncertainty around the U.S’s border dispute with Mexico. On late Friday, Trump said that he had declined to slap tariffs on Mexican imports which he had threatened as a way to stanch the flow of illegal immigration into the U.S.
The 10-year Treasury note yield
climbed 5.7 basis points to 2.141% on Monday, off its lowest levels since 2017. Still, the benchmark rate remains around 60 basis points below where it traded at the start of the year.
The S&P 500
and Nasdaq Composite
were poised to add to their fifth straight daily gain on Monday.
Though stock-market investors might be relieved by the Trump administration’s deal to bring closure to the tariff spat with Mexico, the primary source of trade tensions — China— remains unresolved, said Lyngen.
Days after the U.S. struck a deal with Mexico, President Donald Trump said in an interview with CNBC that he could still bring more tariffs to bear on China if President Xi Jinping didn’t attend the upcoming June 28-29 G-20 meeting in Japan.
“A trade deal with the US’s neighbor to the south does very little to inform expectations on the timing/chances of an agreement with China; it remains difficult to envision a compromise between the White House and Beijing in the coming months,” said Lyngen.
More importantly, signs of the labor market softening up could give the Federal Reserve the impetus to ditch its patient policy stance and set out on its first rate cut since the financial crisis. Expectations for policy easing have spurred a sharp slide in Treasury yields across all maturities this year.
The central bank has historically pointed to the U.S.’s ultra-low unemployment rate to underline its conviction that the economic expansion would extend further and that inflation pressures would bubble up.
But after the nonfarm payrolls report showed the U.S. economy had only added 75,000 jobs in May, falling short of the 185,000 forecast by analysts, investors’ long-held confidence in the resilience of the labor market took a sharp hit.
“The erosion of the final pillar of economic strength restraining Powell’s willingness to preemptively ease marks a true shift in the policy paradigm,” said Lyngen.