Flight to Quality Continues Following Tariff Announcements

Yields fall after President Trump pushes for additional tariffs. The market’s flight to quality continued today with a rally in Treasurys and an equity sell-off. Trump tariffs and weak economic data were the drivers of today’s move, similar to the past several sessions. Treasury yields are currently 50-65 bps lower than YTD highs after today’s 4-5 bp decline, and the short end of the curve is now ~10 bps below 4%. The 10-year yield is nearing 4% itself, currently at 4.16% after hitting 4.79% in January. Meanwhile, the tech-heavy NASDAQ plummeted over 2.60% today and is now at its lowest level since November while the S&P 500 dropped 1.76% to 5,850. The USD rose alongside President Trump’s tariff talks, appreciating against the Mexican peso, Canadian dollar, and Chinese yuan.

Fresh round of tariffs appear set in stone. Markets hoped that the latest set of tariffs announced by President Trump may have been delayed or scrapped altogether, but after the President’s latest comments this afternoon, it seems clear that the measures will be more than just negotiation tools. The President said there is “no room left” for Canada or Mexico to avoid tariffs, and tomorrow may mark the day that a 25% duty is applied on all imports from the two countries (excluding Canadian energy products, which will face a 10% penalty). The tariffs would apply to ~$1.5 trillion in annual imports and have prompted fears of sparking a wider trade war. In response, Canadian Foreign Minister Melanie Joly said the Canadian government is ready to impose retaliatory tariffs. Separately, President Trump also signed an order doubling a tariff on China to 20%, noting that Beijing had “not taken adequate steps” to address fentanyl flows into the U.S.

Manufacturing sector growth slows. The long-struggling US manufacturing sector underwhelmed again in February despite expanding. The ISM Manufacturing Index came in at 50.3, down from January’s 50.9 and below estimates of 50.7. The slowdown was largely driven by rising prices (62.4, the highest since June 2022), which, according to ISM Chair Timothy Fiore, stemmed from tariffs. Meanwhile, new orders saw their steepest decline since March 2022, and employment fell into contraction territory.