Treasuries Rally as Trump Maintains Tariffs on China, Pushes Drilling

(Bloomberg) — Treasuries rallied as U.S. President Donald Trump refrained from imposing specific tariffs on China and revoked bans on offshore oil drilling in most U.S. coastal waters, moves that eased concerns about inflation and strengthened bets on an interest rate cut from the Federal Reserve.

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“It seems likely that the path to lower inflation, Fed rate cuts and lower Treasury yields is opening,” wrote Makoto Noji, chief FX and bond strategist foreign companies at SMBC Nikko Securities Inc., in a note. Indeed, Trump’s decisions to avoid immediately announcing higher tariffs and declaring an energy emergency will help ease inflation fears, he wrote.

Ten-year Treasury yields slipped nearly 10 basis points to 4.53% in Asia on Tuesday as spot trading resumed after a U.S. holiday on Monday. The rise in U.S. bonds was also supported by falling crude prices after Trump revoked offshore oil and gas leasing bans that effectively blocked drilling in most U.S. coastal waters.

Treasuries lost 3.1% in the final three months of 2024, the worst quarterly performance in two years, amid fears that Trump’s policy of tariff hikes and tax cuts does not cause inflation to rise in the United States, thus preventing the Fed from easing its policy.

Investors anticipate further easing of Fed policy. Overnight index swaps now indicate there is a 70% chance the Fed will cut its benchmark rate more than once this year, up from 46% on Friday.

“U.S. yields could rebound if speculation about Fed policy easing gradually diminishes as long as the U.S. economy remains resilient,” Naokazu Koshimizu, rates strategist at Nomura Securities Co. in Tokyo, wrote in a note. “For yields to see a sustained decline, financial conditions need to be sufficiently tighter, which would cause the economy to slow down.”

U.S. yields briefly eased their decline after Trump said he planned to enact tariffs of up to 25% on Mexico and Canada by Feb. 1.

(Updates with comment from the strategist in the 2nd paragraph and oil movements in the third paragraph.)

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