President Trump has proposed placing scaling tariffs on Mexico to stem the flow of illegal immigration. The tariffs are to begin with 5% on June 10 and scale to 25% by October depending on the Mexican government response to the flow of migrants to the US border. The threat comes at a very strange time given the US-Chinese trade tensions and the USMCA deal beginning to move through the approval process. The financial markets have responded in a significant way, especially in the US Treasury (UST) market. Yields for the 2- and 5-year UST have dropped below 2% – a full 25 basis points below the lower bound of the target Fed Funds Rate. In our recent note, Fed offers risk and opportunity, we highlighted our view the Fed would likely reverse the December rate hike before most expect, and the current level of UST yields only serves to reinforce that view.
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