by Alice Gledhill
US government bonds edged higher on Wednesday, extending a blistering rally over the past week spurred by bets that US President Donald Trump would take a more measured approach on imposing tariffs.
The yield on 10-year government bonds fell two basis points to 4.56%, down from as high as 4.81% last week. While the bulk of that move came after softer US inflation data, Trump’s decision not to slap levies from day one has helped consolidate it, and eased concerns over a trade war that could reignite price pressures.
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.
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.”
The Bloomberg dollar index erased an earlier small gain to drop 0.2% by 10:20 a.m. London time. The greenback is now down against every Group-of-10 currency year-to-date except the pound.
European yields have also retreated despite heavy issuance, with the UK and France both drawing record orders for bond sales on Tuesday. The US Treasury will sell $13 billion of 20-year bonds later on Wednesday.
“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.”
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