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The UST curve bear flattened amidst a surge of optimism as Trump announced a 90 day pause in reciprocal tariffs. Aside from China (hit with a 124% tariff rate), other economies get a baseline 10% tariff rate. 2Y yields briefly topped 4% as Fed cuts bets get pared. Meanwhile, the rapid selloff in long end USTs also cooled as market dysfunction eased somewhat. As things stand, the worst of the sentiment deterioration could be behind us with market participants now watching to see what could happen in the next 90 days. We lay out some thoughts below.
First, market dysfunction was starting to be apparent across the different asset classes. Had the volatility continued, some Fed intervention in Treasuries would be needed. As sentiment calms through Trump's tariff pause, markets have become more orderly. There is less urgency for the Fed to act.
Second, there are broad contours to Trump's tariffs when we look through the execution noises. China is the main target. For everyone else, there is room for negotiation. Some tariffs will be sticky to generate revenues. Lastly, sectoral tariffs make more sense as it reduces trade arbitrage. We would expect many economies to be able to cut a deal with the US. In Asia, Japan and Korea (traditional US allies) would probably be amongst the earlier ones to get a deal.
Third, it is unclear how much real economic damage acute market stresses have wrought. Data watching would become important again, starting with tonight's CPI release (consensus: 0.1% MoM sa and 0.3% MoM sa for headline and core respectively).
Against this backdrop, there is a decent chance for volatility to drop further. UST-SOFR spreads have also popped as stresses eased. Yields and curves have also pulled back from extremes and will likely be rangy for a while.
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