TREASURIES-Relief rally pushes long-term yields down after Trump's pivot on Fed, tariffs

BY Reuters | ECONOMIC | 04/23/25 10:37 AM EDT

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Washington signals potential easing in trade war with China

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Trump steps back from threats to remove Fed boss

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Friendlier tariff outcome could give Fed more room to cut rates

By Davide Barbuscia

NEW YORK, April 23 (Reuters) - U.S. Treasury yields declined on Wednesday after the U.S. administration signaled potential respite in the U.S.-China trade war, and after President Donald Trump's softening stance towards the Federal Reserve.

After days of criticism over Fed Chair Jerome Powell's reluctance to lower interest rates, President Trump stepped back from his threats to remove him from his position. Meanwhile, Treasury Secretary Scott Bessent said tensions between the U.S. and China over trade may soon ease.

The soothing signals from Washington boosted the Treasury market, with long-term yields - which move inversely to prices - declining, in a partial reversal of the concerns that gripped investors over the past few weeks because of Trump's seemingly erratic trade and economic policies.

"If there is a more friendly outcome to the tariffs, we would expect we're still in a slower growth trajectory and that the one-time inflation shock (from tariffs) would be less," said Stephen Cianci, senior portfolio manager at DWS Group.

"That would probably give visibility to the Fed to potentially begin to re-engage in cutting," he said, adding he expected the Fed to lower interest rates twice this year.

A survey from S&P Global on Wednesday showed U.S. business activity slowed to a 16-month low in April and prices charged for goods and services soared amid tariff uncertainty.

Vanguard, the world's second-largest asset manager, said in a fixed income outlook report for the second quarter seen by Reuters that it had lowered its growth and labor market forecasts while increasing its expectations for inflation.

"We've updated our outlook due to the broader-ranging tariff policy and added friction from higher levels of business and household uncertainty. A stagflationary-impact scenario is now our base case forecast," it said.

Despite the Treasury relief rally on Wednesday, some market participants cautioned against excessive optimism after Trump's latest turnaround on tariffs and on the Fed.

"The perception of U.S. Treasuries and the dollar has changed," said Justin Onuekwusi, chief investment officer at investment firm St. James's Place. "If you have politicians and policymakers making decisions out of the norm, some will look at this and say this is going to be more volatile and hold less of that asset," he added.

The 10-year Treasury term premium, a measure of the compensation investors demand for the risk of holding long-dated U.S. government debt, rose to 0.84 basis points on Monday, its highest level since 2014, according to the latest available data by the Federal Reserve Bank of New York.

Benchmark 10-year Treasury yields were last at 4.321%, down about eight basis points from Tuesday. Two-year yields were higher on the day, at 3.82% from 3.788% on Tuesday.

Later on Wednesday, the Treasury will sell $70 billion in five-year notes. The auction will be closely watched by investors as a sign of investor appetite for U.S. government debt after a soft two-year note auction on Tuesday. (Reporting by Davide Barbuscia and Dhara Ranasinghe Editing by Nick Zieminski)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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