US Walks Back 100% Tariff Threat on China

Yields rise as US-China tensions ease. UST yields gradually climbed higher throughout the morning as Trump’s comments on trade tensions with China eased market worries of a potential trade war. In the afternoon, yields traded in a tight 2 bp range and ultimately ended 3-4 bps higher across with the curve. The 2-year yield closed at 3.46% (4 bps lower on the week), and the 10-year yield at 4.01% (2 bps lower on the week). Meanwhile, equities rallied today on the US-China optimism and a rebound in regional bank names, with the S&P 500 and NASDAQ ending 0.53% and 0.52% higher, respectively.

Trump, Bessent optimistic on China in a bid to de-escalate. President Trump and Treasury Secretary Scott Bessent spoke on Chinese trade negotiations today, each expressing hope of an agreement amid ongoing talks. The sunny outlook comes after President Trump threatened a 100% tariff on China who announced additional rare-earth export controls; the tit-for-tat moves sparked fears of an all-out trade war. Today, Trump characterized his steep, sweeping levies as “not sustainable” and said, “I think we’re getting along with China.” Meanwhile, Bessent believes “things have de-escalated” and is set to meet with Chinese Vice Premiere He Lifeng at the White House this evening. The meeting comes ahead of President Trump and President Xi’s upcoming meeting which, according to the White House, is still set to occur despite Trump’s prior comments to the contrary.

St. Louis Fed President Musalem could ‘potentially’ support further cuts. Today, Alberto Musalem, St. Louis Fed President and FOMC voter, spoke about his approach to policy decisions going forward. Musalem said, “I could support a path with an additional reduction in the policy rate if there are further risks to the labor market that emerge.” Nevertheless, he remains focused on monitoring inflation as it hovers persistently above the Fed’s 2% target. With the dual mandate in mind, Musalem says he is taking a data-dependent approach with no “preset course.” This is a view that other Fed members such as Jerome Powell and Christopher Waller have also endorsed, and one that highlights lingering policy uncertainty heading into the next few months if the labor market continues to weaken and inflation continues to rise.