Global shares fell and safe-haven sovereign bond yields surged on Friday after President Donald Trump’s unexpected threat of tariffs on Mexican imports added to fears that his escalating trade wars will send the major economies into a slowdown and possible recession in coming months.
Yields on 10-year German bonds fell to an all-time low of minus 0.21%, US 10 year yields were around 2.13%, Japanese yields fell to minus 0.21% and yields on Australian 10-year bonds finished at a record low of 1.45% on Friday.
The Aussie dollar ended May around 69.38, down by around 1.2% against the US dollar over the month.
The renewed concerns about Trump seem to be more substantial than the tantrums we saw from the market in late 2018 over the Fed’s then ‘rate rise looms policy.’
That turned and markets surged from late December through to the end of April, but May has seen a big sell-off in a ‘flight to quality’ by investors more scared of the fallout from Trump’s trade antics than anything else.
Inflation is certainly not a concern. Like in Australia with persistent weak inflation the same time the latest reading of US inflation for April – the so-called Personal Consumption Expenditure measure watched closely by the Fed, showed no sign at all of any cost pressures.
The annual rate for the core inflation reading for April was 1.5%, well below the 2% target of the US central bank. The core reading rose to 1.6% from 1.5% in March.
Economists say the way petrol/oil and metal prices are sliding US inflation could weaken further in coming months, offset by the price impact on import costs from the fallout from Trump’s trade and tariffs wars.
The unpredictability of Trump and his administration is now the major global fear for markets.
In the wake of Friday’s shock tweet about tariff imposts on imports from Mexico, bond yield around the world tumbled as nervy investors sought the safe haven of sovereign bonds (and gold prices also picked up in sympathy).
Yields on Germany’s 10-year government bond – regarded as one of the safest assets in the world – fell to a record low of minus 0.21% while US Treasury 10 year yields slipped to 20-month lows. Dutch bond yields fell to minus 0.02% and those in Switzerland dropped to minus 0.51%.
The 2-year US bond yield which is more sensitive to shifting Fed expectations, plunged 13.6 basis points to 1.937% its biggest daily drop in a year. That saw it fall 23.8 basis points this week and 33.1 basis points for the month, marking its largest monthly drop since November 2008 at the depths of the GFC.
The 10-year Treasury note yield tumbled 8.9 basis points to a 20-month low of 2.139%, extending its weekly drop to 18.9 basis points and its monthly drop to 36.7 basis points (37%).
The 30-year bond yield slipped 7.8 basis points to a 31-month low of 2.577%, adding to its weekly drop of 17.8 basis points and a monthly decline of 35.9 basis points.
May saw the biggest falls since January 2015 in the yields on the 10 and 30 year US bonds.
The Aussie 10 year bond yield of 1.45% was down 7 points in a week and 32 points (0.32%) in May alone.