Jamie Spencer
Treasury yields moved higher on Monday after the U.S. and China reached an agreement to slash tariffs on each other’s goods, a move that was welcomed by investors. The 10-year Treasury yield increased by 8.2 basis points to 4.457%, while the 2-year Treasury yield rose by more than 11.7 basis points to 4%. This positive market reaction signals investor optimism regarding the shift in trade relations.
Details of the U.S.-China Trade Agreement
The agreement, announced on Monday, marks a significant step in easing the trade tensions between the world’s two largest economies. Both the U.S. and China agreed to suspend most of the tariffs they had imposed on each other’s imports. Previously, the U.S. had imposed a hefty 145% tariff on Chinese goods, while China retaliated with a 125% tariff on U.S. products. The new deal reduces the total tariffs on Chinese goods to 30%, keeping a 20% levy related to fentanyl in place.
Market Reaction and Investor Sentiment
The trade deal between the U.S. and China has caused a shift in investor sentiment, with markets reacting positively. “When considered alongside last week’s announcement of a US/UK trade deal, the sentiment regarding Trump’s trade war has clearly shifted in a positive direction,” said Ian Lyngen, head of U.S. rates strategy at BMO. The thawing of relations between the U.S. and China is expected to give the Federal Reserve more flexibility in its future decisions.
Impact on Tariffs and Global Economy
The reduction in tariffs comes at a time when economists had expressed concerns about the potential for a global recession due to the ongoing trade war. The high tariffs imposed by both nations had led to worries about an economic slowdown. However, the new trade deal offers relief, potentially preventing the U.S. from falling into a recession. U.S. Treasury Secretary Scott Bessent, who participated in the talks in Switzerland, expressed satisfaction with the progress made and hinted at further discussions in the coming weeks to finalize a more comprehensive trade agreement.
Federal Reserve’s Response to Economic Developments
The news of the trade deal has also influenced expectations regarding future actions by the Federal Reserve. As the U.S. economy avoids a direct recession, the need for an interest rate cut has diminished. The probability of a rate cut during the Fed’s upcoming June 17-18 meeting has dropped significantly, with the fed funds futures market implying just an 11.3% chance of a reduction.
