Treasuries Gain Despite Tariff and Immigration Concerns

Amid market volatility, Treasury bonds have experienced a positive start to 2025, rising approximately 0.6% through Thursday. This rally comes despite ongoing uncertainty surrounding President Trump's tariff and immigration policies.

Factors Contributing to Treasury Growth

Cool-than-expected inflation data and a surge in safe-haven demand following Monday's stock market selloff have boosted Treasuries. The lack of clarity regarding government policy has also contributed to increased demand for bonds as a haven asset.

Trump's Tariff Announcement

On Thursday, President Trump announced plans to impose 25% tariffs on imports from Mexico and Canada, effective February 1. Although this news initially weakened Treasuries, the market reaction has since been muted, with investors awaiting details on the implementation and duration of the tariffs.

Inflation and Fed Outlook

Data released Friday showed an increase in the personal consumption expenditures index, a key inflation measure monitored by the Federal Reserve. This data, along with upcoming employment figures, will shape expectations for Fed policy. Despite a pause in the easing cycle this week, traders still anticipate a rate cut in the future.

Risks to Bond Market

Higher yields and potential rate increases remain possible if data strengthens as a result of Trump's pro-business policies. Additionally, tariffs and immigration crackdowns could push up consumer prices and keep Fed rates elevated.

Market Positioning

Traders are hedging against potential yield increases by purchasing Treasury options targeting an increase in the 10-year yield to around 4.85% by February 21. However, some analysts believe yields may remain within a fair-value range between 4.25% and 4.75% if economic growth remains stable.

Conclusion

In a market characterized by uncertainty, Treasuries are providing a stable investment option. However, investors should monitor developments in tariff and immigration policies, as well as inflation data and Fed policy announcements, for potential risks to bond prices.