Treasury Yields Rally on Trump's Tariffs Refrain, Offshore Oil Ban Reversal
US Treasuries surged as President Trump opted against immediate China-specific tariffs and rescinded offshore oil drilling bans along US coastlines. These actions eased inflation concerns and fueled expectations of Federal Reserve rate cuts.
"The prospect of lower inflation, Fed rate cuts, and declining Treasury yields is becoming more likely," said Makoto Noji, chief FX and foreign bond strategist at SMBC Nikko Securities.
Trump's decisions to delay higher tariffs and declare an energy emergency will mitigate inflation worries, Noji noted. Ten-year Treasury yields plummeted by nearly 10 basis points to 4.53% in Asia on Tuesday.
The bond rally also benefited from falling crude prices after Trump lifted offshore oil and gas leasing restrictions, effectively allowing drilling in most US coastal waters.
Treasuries had suffered a 3.1% loss in the fourth quarter of 2024 due to concerns that Trump's tariff and tax policies would elevate inflation, hindering the Fed's easing efforts.
However, investors now anticipate aggressive Fed policy easing. Overnight-indexed swaps indicate a 70% probability of multiple Fed rate cuts this year, up from 46% on Friday.
"US yields may rebound if speculation about Fed easing wanes while the US economy remains resilient," said Naokazu Koshimizu, senior rates strategist at Nomura Securities. "For yields to decline sustainably, financial conditions must tighten sufficiently, leading to an economic slowdown."
Treasury yields experienced a brief recovery after Trump announced plans to impose previously threatened 25% tariffs on Mexico and Canada by February 1st.