Since the beginning of the trade war between the United States and China, we’ve seen a rising correlation between U.S. Treasury yields and the Chinese Yuan. This isn’t all that surprising: as the conflict escalated and Washington struck a harder stance, the People’s Bank of China depreciated its currency in order to stimulate exports and the country’s economy. At the same time, investors fearing an economic downturn crowded into safe-haven assets such as US Treasuries, sending yields down.
With the phase 1 agreement officially on paper, the Chinese Yuan has returned to the level it was before the trade war hit its culmination point in August – on January 15th, the PBOC set the currency at 6.8845 USD/CNY (0.14525 CNY/USD), its strongest since the end of July last year. Yet the U.S. 10-year rate has only shown a mild upward trend in the past couple months, as investors are still pricing in an 85% chance of at least one cut by the Fed by the end of 2020. We’re not saying that there’s a causal relationship between the Yuan and U.S. Treasury rates – or that the tail should be wagging the proverbial panda – but, we believe that bond investors haven’t demonstrated enough optimism regarding the trade accord so far, and, hence, that interest rates in the U.S. are still too low.