At around 11:14 a.m. ET, the yield on the benchmark 10-year Treasury note was lower at around 2.17%, off a fresh 20-month low around 2.15% hit in overnight trading. A portion of the yield curve remained inverted as the yield on the 3-month Treasury bill held at 2.354%. The 2-year rate dropped to 2%, up from January 2018 lows around 1.995% clinched earlier in the session.
The 10-year German bund yield hit a low of -0.213%, its lowest level ever back through records that began in 1988.
The flight to safety on Friday came after Trump said the night before that he will impose a 5% tariff on all Mexican imports starting June 10 if Mexico didn’t take unspecified steps to shore up the border, potentially undermining the recently negotiated deal between the U.S., Canada and Mexico.
Donald J. Trump
✔
@realDonaldTrump
On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..
5:00 AM - May 31, 2019
“While the essential ingredient to the overnight rally is unquestionably the President’s threat of tariffs on Mexican goods unless illegal immigration is stopped, the broader backdrop is equally as supportive for Treasuries,” Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets, wrote in an email.
“The ongoing policy quandary of ‘what will it take to get the Fed to cut?’ has been complicated by the gradual nature of the stock selloff which has kept equity volatility, and therefore the tightening in financial conditions, relatively tame,” he added. “Nonetheless, financial conditions are at the tightest level seen since January and the pace of the move is comparable to December.”
Trump’s Mexico tariffs also represent the White House’s latest attempt to pressure an economic partner through the use of trade levies, a tactic Trump has relied on throughout his negotiations with China. The administration imposed 25% tariffs on $200 billion worth of Chinese imports earlier this month following a breakdown in talks between Beijing and Washington.
The stall in U.S.-China talks triggered — in addition to the more expensive imports — a paradigm shift in Wall Street’s upbeat markets and economic outlook. Traders who had been betting on a lukewarm to positive resolution with China punished risk assets like equities in favor of safer assets like U.S. Treasurys, sending the prices of debt higher and yields lower.
The S&P 500 — down 6.1% this month — tracked a 34-basis-point drop in the 10-year Treasury rate, which in turn inverted a portion of the yield curve. Such inversions are often seen as a recession indicator as those who buy debt from the U.S. government for years are compensated with poorer rates than those who loan money for a matter of months.
The difference between the rate on the 3-month Treasury bill and the 10-year Treasury note was last seen at -19 basis points. The spread between the 10-year yield and the 2-year yield remained at a positive, albeit flattish 16 basis points.
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