Two reasons why the Treasury market doesn’t like the sound of a trade war

Treasury yields have been creeping higher today as the White House re-iterated a threat to slap tariffs on Mexico, Canada and China. We will see how it shakes out but it’s a decent reversal given a benign PCE inflation report today.

It’s increasingly clear how the Treasury market views tariffs:

1) They’re inflationary

Some Fed officials dismiss them as a one-off effect but there are many permutations, including retaliation and growth knock-ons. This is straight-forward thinking as raising the prices of things to consumers is the point of tariffs.

2) Trade war spending

If we do end up in some real trade wars, it’s clear that responses from governments will be like covid: Spending money. I find it troubling that Canada is so quick to lay out that playbook given the inflationary disaster that unfolded last time. But that’s the political kneejerk reaction everywhere and more spending isn’t what the bond market anywhere wants to see right now.

On net, we saw yields rise on Trump’s election win and have fallen since inauguration when the didn’t implement the big promised tariffs — especially on China. Now the market is hanging on every report about tariffs.

This article was written by Adam Button at www.forexlive.com.