Yields Drop on Bank Credit Concerns

Yields fall as markets turn risk-off. UST yields traded in a tight range today, until midday, when concerns of borrower creditworthiness in two regional banks rippled through US markets. In the immediate aftermath, yields fell ~6-10 bps, with the 2-year declining to its lowest level since September 2022 and the 10-year yield falling below the 4% level. The move largely sustained itself, with the 2-year yield closing 7 bps lower at 3.42% and the 10-year ending 5 bps lower at 3.97%. Meanwhile, equities declined, driven by regional banking names, with the S&P 500 and NASDAQ closing 0.63% and 0.47% lower, respectively.

Miran continues push for aggressive cuts, while Waller and Schmid prefer a gradual approach. This morning, Fed Governor Christopher Waller spoke in support of lowering policy rates in 25 bp increments, explaining “You don’t want to make a mistake, so the way to avoid that is to go cautiously or carefully and do 25, wait and see what happens, and then you can get a better idea of what to do.” Kansas Fed President Jeff Schmid took a similarly cautious approach and noted that he is hesitant to vote for a rate cut at the October FOMC meeting due to elevated inflation. In contrast, Fed Governor Stephen Miran continues to advocate for rapid monetary policy easing, repeating his view that US-China trade tensions create a greater need for aggressive cuts. Miran said he would support a 50 bp cut at the October FOMC meeting but acknowledged that others are likely to only lower rates by a quarter point.

Trump Administration said to be announcing easing auto tariffs. Following months of lobbying from American carmakers, such as Ford and General Motors, who hoped to find relief from President Trump’s tariffs, sources at the White House say the Commerce Department may announce a 5-year extension on a provision reducing import taxes on car parts. The provision, which was implemented this past April and originally set to last for two years, allows automakers to offset a portion of the 25% tariff that imported car parts face. Under the current provision, car makers are able to offset the levy by as much as 3.75% of the value of American made vehicles, a figure which was then set to decrease to approximately 2.5% in May 2026, before sunsetting a year later. The 5-year extension is expected as soon as tomorrow, though it is unclear if the offset rate will remain at 3.75%. The announcement will likely be included in the paperwork for the formal implementation of heavy-duty truck tariffs that President Trump declared earlier this month.