Traders added to bets on interest-rate cuts from the Federal Reserve amid concern about the impact of US trade tariffs on global economic growth.
Money markets moved to fully price three quarter-point reductions this year for the first time since the middle of December, following the imposition of US levies on Canada, Mexico and China. The curve steepened, with yields on two-year tenors falling six basis points to 3.89%.
The steepening moves were mirrored in Europe, with traders similarly amping up wagers on easing from the European Central Bank on concern that the euro area will be next to face levies. Meanwhile, an aggressive ramp up in EU defense spending pinned the spotlight on growing government deficits and pushed longer-term yields higher.
“Our view remains that tariffs are not an inflation story but a growth story,” said Mohit Kumar, chief economist and strategist for Europe at Jefferies. He expects steeper curves, particularly in the UK and Germany.
The imposition of tariffs marks a turning point for market participants, indicating Trump’s readiness to use threats as more than a negotiating tactic. The new 25% duties on most Canadian and Mexican imports — plus raising the charge on China to 20% — impact roughly $1.5 trillion in annual imports.
The US measures prompted retaliatory levies from both Canada and China, with Mexican President Claudia Sheinbaum on Monday saying her government would await Trump’s decision before reacting.
“The market has to reprice these tariff risks now that they have become reality,” said Kathleen Brooks, research director at XTB. “Markets may remain jittery for the next few days as we wait for the US payrolls report on Friday.”
