US Bonds Rally With Global Peers as Trade War Spurs Safety Bets
(Bloomberg) — Government bonds rallied around the world as escalating trade tensions between the US and China stoked concern that economic growth will falter, prompting investors to seek the safest assets.
Yields on two-year US Treasuries fell as much as four basis points to 3.47%, near the lowest level since April, as trading resumed after a holiday. European government debt mirrored the moves, while gilts outperformed as rising UK unemployment fueled wagers on rate reductions.
After an apparent truce, the US and China are back to making tit-for-tat trade swipes. Market participants are fretting more about the potential impact on growth than how the protectionist measures will affect inflation.
It’s “right back to trade shenanigans, downside growth risks,” said Lauren van Biljon, senior portfolio manager at Allspring Global Investments, on Bloomberg TV. “There’s quite an aggressively priced US easing cycle and maybe the two-year is the best place to benefit from that.”
Markets tumbled on Friday as President Donald Trump threatened new tariffs on China, in response to Beijing tightening export controls on rare earths. In the latest move, China sanctioned US units of a South Korean shipping giant.
Traders boosted wagers on US interest-rate cuts, pricing close to 1.25 percentage points of reductions by the end of next year.
Later Tuesday, speeches from Federal Reserve Chair Jerome Powell and other officials could give a crucial steer on the path forward for policy. The outlook has become tricky to gauge amid a US government shutdown and dearth of economic data.
Yields on US 10-year Treasuries fell to 4% for the first time in nearly a month, before partially retracing the move. Yields on benchmark German bonds dropped as much as five basis points to 2.58%, the lowest level since July 4, while those on their UK counterparts sank seven basis points to 4.58%, the lowest level since Aug. 14.
Government bonds have retained their traditional role as a haven asset, even as concerns around deficits spur some money managers to pursue the so-called debasement trade. Its adherents are pulling away from sovereign debt — and the currencies they are denominated in — on concern their value will be eroded over time, opting instead for precious metals and cryptocurrencies.
Bitcoin fell as much as 3.75% to around $111,500 on Tuesday, Brent crude dropped toward $62 a barrel and US equity futures retreated.
“The drop in equities and commodities is a clear sign of risk aversion,” said Kathleen Brooks, research director at XTB. “Money is instead moving into sovereign bonds.”
(Updates market moves.)
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