U.S.-China Tariffs Spur Additional Recession Fears

Yields climb early but reverse course on US-China tariff news. The short end of the yield curve rose ~10bps to intraday highs early this morning, largely driven by optimism from Treasury Secretary Bessent regarding tariff negotiations. However, yields plummeted on reports that President Trump is eyeing additional tariffs against China. The yield decline continued throughout most of the session at the short end of the curve, where yields closed ~14 bps below session highs and down 4 bps on the day. Meanwhile, the long end of the curve closed above the morning highs, up 11-16 bps on the day. The move pushed the spread between 2-year and 10-year yields to +56 bps, the steepest the curve has been since February 2022.

China tariffs in focus. Despite dozens of countries showing willingness to negotiate tariffs with the U.S., China has proven resolute in its resistance. In response to their lack of openness tonight, levies amounting to a 104% tariff are set to commence on China, the culmination a “tit for tat” retaliation after China announced their own retaliatory tariffs. China said, “The U.S. threat to escalate tariffs on China is a mistake on top of a mistake,” but President Trump publicly remains optimistic for a deal, saying today, “China also wants to make a deal, badly, but they don’t know to get it started. We are waiting for their call. It will happen!”

Former Treasury Secretary Summers says a US recession is forthcoming. Larry Summers argued today that “It’s more likely than not that we’re going to have a recession” due to tariffs. He warned that an extra 2 million Americans would be unemployed while household income losses would total $5,000+ per family. Summers added that the recent flight to quality is very likely to continue, and he expects markets to “reach levels significantly below their current level.” Summers’ perspective contradicts Treasury Secretary Bessent’s recent pushback against expectations for an imminent recession. Bessent noted that 50+ countries had already reached out to the US about lowering trade barriers and tariffs, a promising sign for negotiations. He expanded on that point today, saying, “If they come to the table with solid proposals, I think we can end up with some good deals….”