According to TrackInsight data, since the beginning of the year, investors have accumulated “U.S. investment Grade Bonds” ETFs with inflows reaching a new YTD high (+€21.4b). The trend gained traction over the last 5 days with another €3.0bn of inflows.
In a context where equities have recently been hit by rising global uncertainty, investors’ appetite for safe haven assets, including “U.S. investment Grade Bonds”, have intensified. On Monday, China’s Ministry of Finance announced that it would impose retaliatory tariffs on some $60B in U.S. goods, with levies rising to 10-25% on June 1. Press reports also mentioned that China could possibly curtail its agricultural purchases, reduce Boeing orders, restrict U.S. services trade, or even consider dumping U.S. Treasuries.
In the meantime, the U.S. Trade Representative’s office released a list of about $300 billion worth of Chinese goods that Trump has threatened to hit with a 25% tariff. Under a process outlined by U.S. officials, the new tariffs would not take effect until late June at the earliest. It could happen just as Donald Trump meets with Xi Jinping on the sidelines of a G-20 leaders meeting on June 28-29 in Japan, raising the stakes in an already escalating trade war.
Separately, EU trade chief Cecilia Malmstrom confirmed that the European Union is finalizing a list (€20 billion) of U.S. goods to target with retaliatory tariffs in the event that President Donald Trump, who is expected to make a decision by May 18, imposes duties on car imports. As a reminder, Trump is considering tariffs on imported cars and auto parts, based on a U.S. Commerce Department study of whether such imports threaten U.S. national security.
Political frictions could also skyrocket inside Europe. Ahead of the results of EU parliament elections (May 23-26), Italian Deputy Premier Matteo Salvini said Italy would be ready to break EU fiscal rules as a way to lower unemployment. In France, several polls suggest that the party of far-right leader Marine Le Pen will top the elections, just ahead of President Emmanuel Macron’s REM party.
Elsewhere, latest polls showed that a new political party led by British eurosceptic Nigel Farage appears to be on course to gain more support than the U.K.’s two biggest parties combined. Such a configuration could result in snap general election and could revive fears of Hard Brexit (new deadline on October 31).
All in all, it reinforces the idea that risks associated to central banks’ forecasts are skewed to the downside. Adding that inflation projections have weakened (reaching a 20-month low in the U.S. according to April FRBNY survey), investors expect that global monetary policy will remain accommodative, capping yields.