U.S. Treasury bonds experienced a notable rally following President Donald Trump’s decision to hold off on imposing new China-specific tariffs and reverse offshore oil drilling restrictions across most U.S. coastal regions. These actions have alleviated inflation concerns and increased market expectations for potential interest rate cuts by the Federal Reserve.
Makoto Noji, Chief FX and Foreign Bond Strategist at SMBC Nikko Securities, noted in a report that Trump’s move to avoid immediate tariff hikes, coupled with the declaration of an energy emergency, suggests a favorable path for lower inflation, Fed rate cuts, and reduced Treasury yields.
As cash trading resumed after the U.S. holiday on Monday, the yield on ten-year Treasury bonds dropped by nearly 10 basis points to 4.53% in Asian markets on Tuesday. This rally was further fueled by a decline in crude oil prices, which followed Trump’s decision to lift bans on offshore oil and gas drilling, thus easing supply concerns.
This reversal comes after a tough final quarter for Treasuries in 2024, where bond prices plummeted by 3.1%—the worst quarterly performance in two years. Investors had been concerned that Trump’s fiscal policies, particularly higher tariffs and tax cuts, would escalate inflation and hinder the Fed’s ability to lower rates.
Market expectations now lean towards additional rate cuts from the Federal Reserve. According to overnight-indexed swaps, there’s a 70% likelihood the central bank will reduce its key interest rate more than once in 2025, up from a 46% probability observed just last Friday.
However, Nomura Securities’ Senior Rates Strategist Naokazu Koshimizu cautioned that Treasury yields could rebound if speculation around Fed policy easing fades, provided the U.S. economy remains robust. He added that sustained declines in yields would require tighter financial conditions, which could ultimately slow economic growth.
The market briefly reversed some of its gains after President Trump reiterated plans to impose tariffs of up to 25% on imports from Mexico and Canada, effective February 1, a move that could still impact the overall trajectory of Treasury yields.
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