- Trump paused expected tariffs on Mexico and Canada.
- US Treasury Secretary Scott Bessent noted the US would strive to keep yields low.
- US jobless claims increased to 219,000 last week.
Interest futures held near recent peaks as Treasury yields collapsed after Trump paused tariffs on Canada and Mexico. The pause also came as market participants eagerly awaited the US nonfarm payrolls report for insight into the Fed’s policy path.
US 10-year Treasury yields (Source: Bloomberg)
Interest futures have risen since Tuesday when Trump paused expected tariffs on Mexico and Canada, plunging Treasury yields. Initially, yields had soared in anticipation of tariffs, which would boost the US economy and keep interest rates elevated. However, the outlook shifted when Canada and Mexico escaped tariffs after negotiating better trade deals. Suddenly, market participants were more convinced that tariffs were a negotiating tactic. Therefore, the risk of global trade wars dropped.
Nevertheless, Trump imposed a 10% tariff on Chinese goods, causing an immediate reaction, indicating a likely trade war between the two countries. This provided a temporary boost to Treasury yields. Although the impact of Trump’s tariffs have faded, there is still a risk that he will impose them in the future.
Such an outcome would lower demand for imports in the US, increasing production and local consumption. As a result, the economy would expand faster, leading to a spike in inflation and high interest rates. Interest futures perform poorly when rates are high, as Treasury yields rise.
Elsewhere, on Thursday, US Treasury Secretary Scott Bessent noted the US would strive to keep yields low. He believes lower oil prices will contain inflation. However, experts believe Trump’s policies might keep Treasury yields on a bullish trend, which could hurt interest futures in the long run.
Elsewhere, data on Thursday revealed that US jobless claims increased to 219,000 last week, above estimates of 214,000. The increase indicated softer demand for labor that could pressure the Fed to lower borrowing costs.
However, market participants are paying more attention to the looming US monthly employment report. According to estimates, the US economy generated 169,000 jobs in January, well below the previous month’s increase of 256,000. Meanwhile, the unemployment rate might hold at 4.1%.
An upbeat report will show labor market resilience that will likely keep the Fed on a cautious path. Prolonged high rates would hurt interest futures. On the other hand, a downbeat report would indicate softer demand, putting pressure on the Fed to cut interest rates.
