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Liberation Day tariffs (universal 10% (effective on 5 March) and reciprocal (effective on 9 March) announced turned out to be more severe than what the market was pricing, triggering a sharp reaction across different asset classes after market close. If implemented, this set of tariffs will drive duties on US imports above 20%. As risk aversion spreads, haven bids were seen in USTs, driving yields lower across the board. Amidst the volatility, there are a few points to consider. First, universal tariffs are unlikely to be negotiated away in so far as Trump intends tariffs to be an external revenue source. Second, there is probably room for negotiation for reciprocal tariffs given that the deadline is about a week away. Third, some countries may retaliate, triggering another round of weak sentiment.
Taking these into account, UST yields are likely to be depressed as investors increasingly worry about US recession / stagflation. The concern outside of the US would be of increasing growth headwinds (limited concerns on inflation). From a policymaking perspective, more fiscal and monetary support would probably be in order. This should arguably lead to steeper curves. For EM /Asia, there are additional complications. Risk aversion and currency weakness may constrain space for central banks to support the economy. Much will depend on how negotiations play out over the coming week. On a separate note, investors would need to shift attention back to labour market data on Friday where investors will be looking to see if hard data remains decoupled from soft data (weakening).
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