Yields on benchmark 10-year bonds touched the lowest level since March, correlating with a slide in the offshore yuan, widely seen as the key barometer of risk sentiment over trade. The yen rallied, building on a four-week run of gains, while European stocks fell. Traders meanwhile boosted bets on a rate cut from the Federal Reserve this year.
“I can’t see a real deal before the G-20 summit in June,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale in London. “The rally is more than justified. I am surprised that bonds are not rallying more.”
The conflict between the world’s two biggest economies has taken a turn for the worse over the past week, with Trump imposing another wave of tariffs on Chinese goods Friday. That has increased fear in markets that any further escalation could seriously jeopardize the global economic recovery before many of the world’s central banks have had a chance to normalize monetary policy.
The U.S. told China it has a month to secure a trade deal or face tariffs on all its exports, ratcheting up pressure after it accused President Xi Jinping’s government of backpedaling on promises. China has said additional duties imposed should be removed for an agreement, setting the stage for weeks of uncertainty in financial markets after investors had thought a pact was near.
“Markets have grown less optimistic about the U.S.-China trade negotiations after some news reports from China’s state-run media suggested a harder stance,” said Mayank Mishra, macro strategist at Standard Chartered Bank in Singapore. “The risk of protracted U.S.-China trade tensions may weigh down USD/JPY in the short term.”
Yields on 10-year Treasuries fell as much as five basis points to 2.41%, the lowest level since March 29. The yen strengthened against all of its major peers, rising as much as 0.3% to 109.60 against the dollar. Offshore yuan fell as much as 0.9% to 6.91 per dollar, a 2019 low. S&P 500 futures dropped 1.3%.
The U.S. hiked tariffs on more than $200 billion of Chinese goods on Friday, with the Asian nation vowing to retaliate. A week of tense stand-off before crucial talks in Washington led to the yen strengthening by 1 percent. It touched 109.47 against the dollar on Thursday, its highest since February.
Societe Generale estimated that should the current tariffs remain in place, growth in the U.S. economy will be crimped by 0.25% over a two-to-three year horizon, compared with 0.5% in China. The impact globally will be 0.15%, while the imposition of tariffs on all Chinese goods could double the pain, O’Hagan said.
Trump piled on the pressure on Saturday, tweeting that “far worse” terms would be on offer for China if it doesn’t act now. While China has invited a U.S. delegation back to Beijing, no dates have been set for the next round of talks, according to White House economic director Larry Kudlow.
The iShares 7-10 Year Treasury Bond ETF (IEF) was trading at $106.68 per share on Monday afternoon, up $0.56 (+0.53%). Year-to-date, IEF has gained 1.74%, versus a 5.72% rise in the benchmark S&P 500 index during the same period.
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