President Donald Trump stepped back from the brink this week after rattling the global trade relations and the financial system that underpins them. But the rattling hasn't stopped. The rapid, synchronized sell-off of long-term Treasuries and the dollar continued on Friday, signaling that America's role as the premier destination for global investors may be reversing.
The 10-year Treasury yield jumped as much as 20 basis points to 4.59% on Friday morning, before pulling back to 4.48% in afternoon trading. For the week, the 10-year yield is still up 49 basis points, amid massive selling in Treasuries.
The U.S. dollar index fell more than 1% early Friday, before coming of its lows, but is still down about 2.5% for the week against a basket of advanced economy currencies, not far off a seven-month low.
Treasury Yields, Dollar In Synchronized Sell-Off
The real story isn't the level of either the dollar or longer-term Treasury yields, though the latter means higher borrowing costs for mortgages and auto loans. It's that investors are fleeing the safest U.S. assets at a perilous economic moment, which would normally see safe-haven flows boosting the dollar and Treasury prices, which move in the opposite direction of Treasury yields.
"Markets continue to reassess how much of the historical premium for U.S. assets stemming from American exceptionalism is still justified under the radical vision and volatile policy of the new U.S. administration," wrote Peter Sidorov, senior international economist at Deutsche Bank.
S&P 500
The S&P 500 reversed early losses, rallying 1% in volatile Friday afternoon trade. The early sell-off came despite tame producer price index data. Combined with Thursday's consumer price index, the two inflation reports suggest that the Federal Reserve's primary inflation rate, the core PCE price index, will ease to 2.6% in March from 2.8% in April, according to Pantheon Macroeconomics.
Meanwhile, the University of Michigan consumer sentiment index out Friday showed the expectations gauge sliding 10% in April to its lowest level since May 1980. Long-term inflation expectations rose to 4.4%, up from 4.1% last month and the highest since June 1991. The one-year inflation expectations reading spiked to 6.7%, the highest since 1981, from 5% in March.
The Fed has signaled its reluctance to step in and support the economy because Trump tariffs will boost inflation in the near term.
