Daily Market Color May 6, 2019Trump Threatens Additional China Tariffs, Sending Risk Assets Lower Tariff talk throws markets back into disarray. President Trump threatened to raise tariffs on Chinese imports over the weekend, tweeting that the current 10% tariffs on $200 billion of Chinese goods will rise to 25% on Friday. Risk assets immediately reacted, futures falling and US equities immediately opening 1.5% lower. The significant escalation in trade tensions came as a complete surprise to investors, and the VIX or “Fear Index” rose nearly 6 points before closing at 15.44. The S&P 500 and the Dow Jones Industrial Average bounced back from their lows– closing 0.25% and 0.45% lower on the day. Fed warns on leveraged lending risks. The Federal Reserve joined the chorus of market participants warning that the high levels of leverage at US companies could exacerbate a financial downturn. Former Fed Chair Janet Yellen and the International Monetary Fund have also gone on the record warning against excesses in the space, noting that nearly 3/4s of the global economy was experiencing high levels of corporate debt. Despite the increase in lending to distressed companies, high yield credit spreads remain depressed both in Europe and in the US. Yields and swap rates fall as Treasurys rise on risk-off move. Treasury yields and swap rates both fell 5-6 bps across the curve, reversing last week’s increase. The 10 year Treasury yield ended the day at 2.47% after climbing as high as 2.56% in last week’s post-FOMC selloff. Fed funds futures now imply a 61% likelihood of a rate cut by 2020. The spread between 10 year and 2 year yields, a measure of yield curve steepness, fell to 17.6 basis points after hitting a year-to-date high of 26 basis points last week.