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BOND REPORT : Treasury Yields Tip Higher As Investors Uncertain About Tariffs And White House Turmoil

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03/07/2018 | 10:18pm CEST

By Mark DeCambre, MarketWatch

Treasurys switched from gains to losses Wednesday, pushing yields modestly higher, as investors struggled to figure out the upshot of President Donald Trump's import tariffs.

Plus, traders are unclear over the White House's future policy path after economic adviser Gary Cohn resigned.

How are Treasurys performing?

The 10-year Treasury note yield was up by 0.6 basis points to 2.883%, according to WSJ Market Data Group. The two-year note yield was slightly higher by 0.8 basis points to 2.254%. The 30-year bond rate rose 1.6 basis points to 3.151%.

Debt prices rise as yields fall, and vice versa.

What's driving Treasurys?

Worries about a disruption to markets arising from the prospect of a global trade war continue to mount, following the Cohn news late Tuesday. His exit is seen elevating the likelihood that Trump will push forward with plans to institute tariffs on steel and aluminum imports soon. The New York Times reported (https://www.nytimes.com/2018/03/07/us/politics/trump-steel-aluminum-tariffs.html)that the White House would sign off on the tariffs on Thursday.

Moreover, Cohn had served as the president's top adviser for 14 months and was widely seen as pro-business and pro-trade by market participants and the man behind corporate tax cuts written into law late last year. The ex-Goldman Sachs banker was said to be working on a rollout of an infrastructure-spending proposal. However, Cohn didn't favor imposing tariffs, preferring free-market policies over protectionist ones.

At the same time, tariffs could stimulate inflation and sap demand for long-dated Treasurys. Inflation tends to be bearish for bonds, as higher prices can erode the value of their fixed-interest payments.

Wall Street is still gearing up for Friday's jobs report. Traders will mostly pay attention to the average hourly earnings number as broad-based wage gains are still missing from the inflation picture.

Read more:How a tariff-rattled stock market is reacting to Cohn's resignation

Also check out: Here's why bonds might not be a haven in a trade war

The Trump administration also is considering a broad range of import tariffs on Chinese goods, according to a Bloomberg report citing unnamed sources familiar with the matter.

Meanwhile, the European Union officials are priming their regulatory guns to fire back at Trump's tariff plan.

What are market participants saying?

"Interest rates look to have stalled out, and give no clear-cut picture over the last couple of weeks. Yet sentiment remains quite negative on Treasurys, offering a bullish view on Treasuries similar to what happened last March when yields peaked out. Overall, the next few days will be important in gauging the effect of the tariff implementation and seeing how markets react," wrote Mark Newton, market analyst at Newton Advisors, in a Wednesday research note.

"The resignation of Gary Cohn as chief economic adviser to the president highlights the difference of opinion on global trade within the Trump administration. It has become clear that not everyone supports the president's plan to impose tariffs on steel and aluminum, as the potential to spark up a trade war is escalating. Protectionist policies will act like a wet blanket on global trade and markets continue to react negatively to these types of policies," said Charlie Ripley, senior investment strategist for Allianz Investment Management.

What data are in focus?

What else is on investors' radar?

Atlanta Fed President Raphael Bostic said tariffs have cast uncertainty over the economy and could affect the number of rate hikes this year, Bloomberg News reported (https://www.bloomberg.com/news/articles/2018-03-07/fed-s-bostic-says-trade-battles-could-dampen-need-for-rate-hikes). Bostic will join the voting members of the Federal Open Market Committee, the central bank's rate-setting body.

Fed Gov. Lael Brainard said a steeper rate-hike trajectory could make sense if economic "tailwinds" continue to prevail. In the past, she has been one of the most dovish members of the FOMC, and her hawkish tone could, therefore, signal a potential sea change in the central bank's leanings towards a faster pace of rate increases from its adherence to a gradual path.

What other assets are on the move?

The German 10-year government bond , viewed by some as a proxy for the health of the European economy, saw yields at 0.660%, compared with 0.676% in the previous session.

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