(Bloomberg) -- For all the hand-wringing about the potential fallout of Donald Trump's expansive, pro-growth policy agenda, the US Treasury market has gotten off to a smooth start.
In Trump's first full trading day back in the White House, government bonds rallied, pushing down yields to their lows of the year, while stocks rose and the dollar regained its footing. Optimism spread across financial markets as Trump, who kicked off his second term with a flurry of executive orders on immigration, diversity and other issues, said that he'd hold off on immediately slapping tariffs on China and would only consider putting levies on Mexico and Canada next month.
A retreat in oil prices also helped to ease concerns over inflation as the new administration eases into its America First policies.
Since Trump swept back into power in November's election, concern his administration's tariffs and tax cut policies would erode the nation's finances and reignite inflation have pushed US yields to multiyear highs. But by Tuesday's close, they were back well below the 5% mark, with the 30-year's lower on the day by six basis points to 4.80%.
Granted, there are still plenty of reasons to worry about the sustainability of debt and deficits in the US and a potential trade war that would add to inflationary pressures and ripple through the world's financial markets. And while it's risky to read too much into 24 hours of trading, Wall Street firms from Goldman Sachs to Societe Generale have warned against reading too much into Trump's stated plans, for now.
"Trump is going to be Trump, so he's going to throw his bricks to the window at times and make statements that get the markets riled up," said Glen Capelo, a managing director at Mischler Financial Group. "But at the end of the day, Trump is a businessman and he understands low rates. So I'm confident that rates will be lower, not higher."
Capelo said Trump's gradual start on signals for tariffs on Monday as well as his pick for Treasury Secretary, Scott Bessent, were both positives that should help continue to support a retreat of yields.
The move in yields was echoed in currency markets, where the Bloomberg Dollar Spot Index was little changed after earlier soaring 0.7% on Trump's plan to impose previously threatened tariffs of as much as 25% on Mexico and Canada by Feb. 1. The Canadian dollar and Mexican peso also pared earlier moves.
Wall Street firms from Goldman Sachs to Societe Generale urged caution on reading too much into Trump's stated tariff plans on Canada and Mexico. At Goldman, Chief US Political Economist Alec Phillips pointed out 25% levies on the two economies is far from guaranteed, adding that "we think the best signal regarding the outlook is that he did not follow through with the tariffs on Inauguration Day as pledged."
Kit Juckes, the chief currency strategist at Societe Generale, expects that the dollar will continue to bounce around presently high levels without advancing much further from here.
"Tariff threats are made, softened, reaffirmed and there will no doubt be nuances," Juckes wrote. "Our tactical conclusion is obvious — the high plain will be windy, bumpy, unforgiving terrain and day-to-day life will be uncomfortable."
The question now becomes how much longer the wave of relief can wash over Treasuries. The Federal Reserve meets next week, with traders expecting officials to leave interest rates on hold until later in 2025.
To Harvard University Professor Ken Rogoff, a "burst of inflation" is likely in the next five to seven years. But until then, he finds the potential for a Fed cut to be as high as that of a hike as officials adjust to a new economic reality.
"We expect further declines in Treasury yields," said Mark Haefele, chief investment officer at UBS Global Wealth Management, who sees 10-year yields at 4% by mid-2025. He expects tariffs won't prevent inflation continuing to fall, allowing the Federal Reserve to cut rates by half a point this year.
Still, market participants including ING and Nomura see Tuesday's rally as only a temporary respite from the march higher in yields. Treasuries lost 3.1% in the final three months of 2024, the worst quarterly performance in two years.
"We still argue for higher US rates from a structural perspective," wrote ING rates strategists including Michiel Tukker in a note. "Plenty of Trump's intended policy measures are inflationary, and failing to address the growing deficit adds to the upward pressure for US Treasury yields."
--With assistance from Ruth Carson, Masaki Kondo and Carter Johnson.
(Adds comment, detail and updates pricing throughout.)
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