For Bond Market, Trade-War Armageddon Looks Far From Imminent

(Bloomberg) -- The U.S. Treasury market has yet to buy fully into the fear that's sending equities sliding -- that the world is on the precipice of a trade war.

The S&P 500 is down about 8 percent from its intraday high in March amid escalating trade tensions, while the benchmark 10-year Treasury yield has dropped less than 0.20 percentage point in that period, suggesting the debt is seeing only marginal haven buying.

For strategists following the world's biggest bond market, the relative calm shows the market expects that U.S. protectionist measures -- and retaliation by China and other countries -- will fail to derail global economic growth or deter the Federal Reserve from hiking rates.

“Calmer heads are prevailing in the bond market with participants there realizing that the end game is likely to be much less onerous than what are in the initial proposals,” Marty Mitchell, an independent strategist, wrote in a note Wednesday. “The bond market seems also to be taking the view that the economic impact of any future changes in tariffs from either side is going to be fairly minimal.”

Shares slumped Wednesday as China said it would levy an additional 25 percent levy on around $50 billion of U.S. imports, including soybeans, automobiles, chemicals and aircraft, in response to proposed American duties. Ten-year Treasury yields fell about 1 basis point to 2.77 percent, well within the range of the past week.

That's not to say traders haven't been busy. Even as the decline in yields has been contained, volume Wednesday morning is about twice the normal level, according to Jim Vogel, a strategist at FTN Financial Capital Markets.

“Interest rates haven't given up trying to follow stock-price volatility, but they do have a better sense than stocks of the fundamental development and timeline of trade skirmishes,” Vogel wrote in a note Wednesday.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

©2018 Bloomberg L.P.