The U.S. Treasury bonds, especially the long-dated ones, have gained popularity lately especially in the wake of declining yield and demand for safe haven amid the trade turmoil. This is especially true, as the spat between the United States and its major partners especially China has turned bitter with a tit-for-tat exchange of tariffs.
Amid escalating dispute, Trump is seeking to curb many Chinese companies from investing in U.S. technology firms and block additional technology exports to China. The Treasury Department is working on the rules to block companies with at least 25% Chinese ownership from buying companies involved in “industrially significant technology.” The measures are expected to be announced by the end of this week and are intended to counter Beijing’s Made in China 2025 strategic plan.
The potential curbs came on the top of tariff imposed on $50 billion worth of Chinese goods; of which penalties on $34 billion will come into effect on Jul 6. Trump has further announced $400 billion tariffs of up to $400 billion on Chinese goods if Beijing retaliates.
The trade dispute with the European Union (EU) also deepened on Jun 22 after Trump tweeted that he would impose another 25% tariff, targeting imported autos from the European Union. The response came following EU’s threat of 25% duties on $3.2 billion worth of American goods exported to the 28-member bloc, starting Jun 22, against U.S. tariffs on European steel and aluminum. The worsening tariff talks could ignite a global recession, compelling investors to take flight to safety.
Further, the behavior of the yield curve justifies the bullish trend in Treasuries. This is because the short end of the yield curve is rising faster than the long end and the spread between the 2-year and 10-year yields tightened to 32 bps, indicating the lowest level since 2007. This trend will likely continue given the tightening Fed policy. Moreover, emerging markets’ fallout and uncertainty in Europe are resulting in significant bond flows back into U.S. Treasuries.
