On Monday, Treasury yields experienced an upward movement following a significant development in U.S.-China trade relations. The two countries have agreed to reduce tariffs on each other's goods, a decision that has been positively received by investors. This agreement led to a rise in the 10-year Treasury yield by 6.6 basis points, reaching 4.441%, while the 2-year Treasury yield saw an increase of more than 10 basis points, reaching 3.985%. It's important to note that a basis point is equivalent to 0.01%, and there is an inverse relationship between yields and prices.
The trade agreement between the U.S. and China marks a crucial step in easing tensions that have been escalating due to the trade war. Both nations announced on Monday the suspension of most tariffs that had been imposed on each other's imports. Under the new terms of the deal, tariffs will be reduced significantly. Initially, the tariffs were as high as 125%, but they will now be reduced to 10%. However, it is noteworthy that the U.S. will maintain its 20% duties on Chinese imports related to fentanyl, which means the total tariffs on China still stand at 30%.
Ian Lyngen, head of U.S. rates strategy at BMO, expressed optimism about the recent developments. He highlighted that, when viewed alongside last week's announcement of a U.S./UK trade deal, the overall sentiment surrounding President Trump's trade policies seems to be shifting positively. The easing of trade tensions between the U.S. and China is expected to provide the Federal Reserve with more flexibility in its policy decisions.
Before this agreement, the effective U.S. tariff rate on China was at 145%, while China had implemented 125% tariffs on U.S. goods. Economists had been concerned that these high tariffs could potentially push the U.S., and possibly the global economy, into a recession. The reduction in tariffs is thus a welcome relief for many who feared the economic implications of prolonged trade hostilities.
U.S. Treasury Secretary Scott Bessent provided further insights during a news conference held after the talks in Switzerland over the weekend. He described the discussions as "very productive" and credited the serene environment of Lake Geneva for contributing to a positive negotiation process. Bessent announced that both countries have agreed on a 90-day pause and a substantial reduction in tariff levels, with both sides reducing reciprocal tariffs by 115%. He also mentioned plans to meet with Chinese representatives again in the coming weeks to work towards a more comprehensive trade agreement.
The possibility of a near-term rate cut from the Federal Reserve appears to be diminishing due to these developments. If the U.S. can avoid slipping into a recession, there may be little need for the central bank to intervene to stimulate the labor market. According to the CME's FedWatch Tool, the likelihood of a rate cut at the June 17-18 meeting is just 11.3%.
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Overall, the reduction in tariffs between the U.S. and China marks a significant milestone in international trade relations, offering a more positive outlook for global economic stability. This development is seen as a pivotal moment that could potentially steer the U.S. away from recession risks and provide a more favorable environment for future trade negotiations.