The U.S. yield curve steepened in jittery markets as weeks of tariff threats from U.S. President Donald Trump came to fruition, fueling concerns about the impact on global growth.
Rates on 30-year Treasuries rose 2 basis points as of 10:41 a.m. in London, as yields on shorter-maturity securities slipped a similar amount following the imposition of levies on Canada, Mexico and China.
Yield curves also steepened in Europe, with rates on two-year German bunds falling five basis points to 2.02%. Traders added to bets on interest-rate cuts from the European Central Bank on concern that the euro area will be next to face levies, while an aggressive ramp up in EU defense spending pinned the spotlight on growing government deficits.
“We see structurally steeper curves,” said Mohit Kumar, chief economist and strategist for Europe at Jefferies, who favors this trade in the UK and Germany. “Our view remains that tariffs are not an inflation story but a growth story.”
The imposition of tariffs marks a turning point for market participants, indicating Trump’s readiness to use tariff threats as more than a negotiating tactic.
The new 25% duties on most Canadian and Mexican imports — plus raising the charge on China to 20% — impact roughly $1.5 trillion in annual imports. The measures prompted retaliatory levies from both Canada and China, with Mexican President Claudia Sheinbaum on Monday saying her government would await Trump’s decision before reacting.
“The market has to reprice these tariff risks now that they have become reality,” said Kathleen Brooks, research director at XTB. “Markets may remain jittery for the next few days as we wait for the US payrolls report on Friday.”
Data this week on factory activity suggests the US economy is edging closer to stagnation, raising the stakes for the widely-watched labor market report.
Beyond tariffs, markets were whipped on Tuesday by a barrage of headlines on the US pausing military aid to Ukraine and that the EU is looking to extend €150 billion ($158 billion) in loans to boost defense spending. That spurred a wave of risk aversion, with the Swiss franc and Japanese yen leading gains by Group-of-10 currencies against the dollar while stocks slumped.
Bloomberg’s Dollar Spot Index — previously a beneficiary of tariff talk — slipped 0.2% on Tuesday.
“It’s going to be a bumpy ride,” said Chris Turner, head of FX strategy at ING, adding that plans for aggressive defense spending in Europe and concerns around the US economic outlook are weighing on the greenback for now. However, “we still think the dollar will broadly strengthen in the first half of the year.”
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