Treasuries gained Monday after the U.S. temporarily exempted some tech products from its tariffs.
The rally lowered yields by as much as 16 basis points for five-year notes, which dipped below 4 per cent. Friday’s peak of 4.22 per cent was the highest level since Feb. 25. For two- to 10-year notes, yields declined at least 13 basis points.
The drop came as markets continued to be whipsawed by President Donald Trump’s shifting trade policies, with the administration extending makers of phones, computers and other electronics a temporary reprieve from its more punitive import levies. There were also some signs of an easing in the unwinding of Treasury trades set off by recent market swings.
“It certainly is calmer for sure,” said Tom di Galoma, managing director at Mischler Financial Group. He said the market would likely remain so, “until we hear something new from the White House.”
Treasuries extended their rally Monday afternoon after Federal Reserve Governor Christopher Waller said he expects tariffs’ impact on inflation to be temporary. In that case, interest-rate cuts would “very much” be on the table for the latter half of 2025, he said.
Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said he suspected “forced selling in U.S. Treasuries over the past week has probably creating a buying opportunity.” But there’s no certainty “all that forced selling is over,” keeping the firm “on the sidelines for right now.”
Across Wall Street, strategists held generally positive views of U.S. bonds, with those at Barclays Plc recommending buying five-year Treasuries based on risks to economic growth. Still, several flagged the risk of erosion in foreign demand for U.S. government debt.
The advance in Treasuries follows a tumultuous week, when bonds tumbled amid speculation that the turmoil unleashed by Trump’s trade war was spurring foreign selling and jeopardizing the market’s status as one of the safest havens.
The market volatility and Trump’s frequent policy shifts have left yields elevated even as the White House’s bid to pull the U.S. back from global free trade threatens to slow growth or set off a recession. That’s usually positive for bonds, which rally whenever the Federal Reserve slashes interest rates to get the economy going again.
This time, however, Trump’s policies are also threatening to deal the U.S. another inflation shock, which could limit the Fed’s actions, and have unnerved overseas investors who help finance the government budget deficit by buying its bonds. Attention will be on Fed Chair Jerome Powell Wednesday when he speaks to the Economic Club of Chicago about the economic outlook.
There were some signs of more positive sentiment toward Treasuries, and futures data from Friday showed that open interest dropped sharply, suggesting that investment funds had unwound leveraged positions.
Some Wall Street dealers were advising clients to shift into some segments of the Treasuries market as the economic outlook darkens, with Barclays saying five-year bonds are attractive given the “downside risks.”
Bob Michele, who heads fixed income at JPMorgan Asset Management, said on Bloomberg Television that Treasuries may have hit the bottom for now amid signs of robust foreign demand and expectations the Fed will support U.S. government debt when needed.
The next test of investor appetite will come with a US$13 billion auction of 20-year Treasuries on Wednesday, though sales of 10- and 30-year bonds last week were met with solid demand.
Michael Mackenzie, Bloomberg News
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