Trade war risks have intensified over the weekend. On Saturday, Trump announced 25% tariffs on Mexico and Canada (with a lower/10% tariff on Canadian energy), and an additional 10% tariff on Chinese goods. Those countries have threatened to retaliate and, with that, several risk assets sold off overnight/this morning. That includes sharp moves lower in the CAD (-1.1%), and MXN (-2.1%).
US Treasuries, though, are broadly unchanged on the news, reflecting a mix of factors, including: (i) a safe haven bid (which is normal when equities/risk assets are sharply lower); and (ii) concerns about the inflationary impact of tariffs (e.g. see higher US 5 year breakeven rates this morning). How Treasuries behave in coming weeks will therefore be watched closely. Arguably, though, downside risks to US economic growth are beginning to build (with a trade war likely to add to those concerns).
In that respect our medium term Treasury models have recently generated a clear BUY message. Measured sentiment indices, for example, are bearish (a contrarian BUY signal), while speculative positioning remains net SHORT (albeit not at extreme levels). As such there’s plenty of fuel for further upside in Treasuries. Elsewhere our medium term technical scoring system has recently been on BUY (although is currently mid-range, see fig 1b below). See latest Longview Asset Allocation research for detailed US Treasury recommendations.
Fig 1: US Treasury 10 year government bond yields with 50, 90, & 200-day moving averages
Fig 1a: US 10 year bonds net speculative positions (deviation from trend) vs. US Treasury 10 year bond yields (inverted)
Fig 1b: Longview medium term technical scoring system vs. US 10 year bond futures
