The US-China Trade War and the Bond Market

The US-China Trade War and the Bond Market

“Trade war” had been one of the main highlights of the media for the past few months, and several actions from the United States had fueled worries that a commercial conflict between the major economic powers (especially with China, but lately the European Union, Canada, and Mexico seem to be involved, as well).

An escalation of the conflict will have tremendous impacts on the global financial markets, but this time we will focus on the bonds market, in order to help with some insights those people wanting to trade bonds.

The current situation in a nutshell

July 6^tth had been the day when the United States imposed tariffs on $34 billion worth of Chinese goods. China immediately retaliated, imposing measures against the US with the same impact. On July 11^th, the Trump administration came out with a list of additional $200 billion worth of Chinese goods which might be subject to a 10% tariff.

Although the measure had not been implemented immediately, official sources mentioned that the plan will undergo a 2 month revision period. Thus far, China had a defensive approach, and officials had mentioned several times that they do not want to escalate. A tit-for-tat approach will most likely prevail if the US will go on further and implement those tariffs in late August.

Negative impacts could be seen

As a result of these new tariffs, consumers could be the ones hit the most, since prices could go up substantially. Inflation will also advance higher, putting pressure on bonds prices and contributing to the rising yields (because between bonds and yields we have a negative correlation). Investors who trade bonds might find themselves in a bearish market that could last until the trade conflict between the major economies will cease.

Source: https://www.pexels.com/

The already sluggish global economic recovery could suffer from these conflicts, contributing to a compounding effect that will worsen even more the majority of economic indicators.

In terms of the US market, most analysts expect yields to rise in the following years. The shift in Fed’s monetary policy which had embarked on a path of on normalization, combined with a rising budget deficit which could reach $1 trillion by 2020 due to the latest fiscal measure, will result in harder financing conditions for the United States.

The leadership is what matters the most in this kind of situation, as Ray Dalio – one of the most famous investors had mentioned several times.

Risk warning and disclaimer

Bonds trading carries risk and might not be suitable for everyone. You should carefully consider before deciding to invest in bonds. No information contained in this article should be regarded as an investment decision.