US Government bonds: President Trumpâ€™s comments sent yields down
Markus Allenspach, Head Fixed Income Research, Julius Baer
It’s the time of the year we are all waiting for the report of the US Treasury about currency manipulators. The report is the product of a highly political process and hard to predict. In this environment, President Trump’s comment that the dollar is too strong had some considerable impact on the market. In all modesty, President Trump reckons that his own credibility is one of the drivers of the dollar’s strength. For bond markets, more relevant was his comment about monetary policy. We all know that the Republicans criticized Fed Chair Janet Yellen for not lifting rates fast enough in the past. They argued that her policy is only fuelling Wall Street profits at the expense of the American saver. In a remarkable U-turn, President Trump now hails low interest as an essential tool to keep the dollar under control. His remarks sent the yield of the 10-year Treasury note down to 2.24 per cent. The yield of the two-year note, which is more sensitive to Fed rate expectations, declined five basis points to 1.2 per cent following his words.
The Federal Reserve is proud to be independent and we maintain our call for more rate hikes despite the latest words of President Trump. Accordingly, we see the latest move of US government bond yields as unsustainable against the backdrop of rising core inflation, low unemployment and the strong reading of cyclical indicators.