Expectations of interest rate cuts resonate with trade tensions, as the two-year US treasury bond yield approaches the lowest level since 2022.

Due to market expectations of further interest rate cuts in the United States, and renewed tensions in US-China trade stimulating demand for safer assets, US Treasuries prices rose slightly. On Wednesday, the yield on the 10-year US Treasury fell by 2 basis points to 4.01%. If it falls below 4%, the yield will hit its lowest level since early April; the yield on the 2-year US Treasury fell by 1 basis point to 3.47%, close to its level three years ago. Since the escalation of trade friction last week, triggering renewed demand for US Treasuries as a safe haven, US Treasuries prices have risen, with yields falling by more than 10 basis points. Federal Reserve Chairman Jerome Powell hinted in a public speech on Tuesday that, due to signs of economic weakness, the Fed may cut interest rates again later this month. Powell also mentioned that the central bank may soon stop shrinking its balance sheet, further supporting US Treasuries prices. Meanwhile, global bond markets are generally strengthening. Strong demand in Japan's 20-year government bond auction has pushed up prices of long-term bonds; French bonds have also strengthened due to market expectations that the country's government will overcome the latest political turmoil. Pepperstone's senior research strategist Michael Brown said that the current level of US Treasury yields suggests that investors expect the federal funds rate to fall from its current level of about 4.25% to 3% by mid-next year. Therefore, Brown believes that unless the shock brought about by Trump triggers renewed safe-haven demand, yields are unlikely to further decline significantly. "If the threat of 100% tariffs proposed by Trump begins to look more realistic, the most likely factor to further increase US Treasury prices (i.e. lower yields) is if market fears about economic growth intensify again," he said. Investors will focus on manufacturing data released later on Wednesday, as well as speeches from Fed policymakers including Stephen Miller, Christopher Waller, and Jeffrey Schneider. Due to the continued government shutdown causing data delays, key inflation data originally scheduled for release on Wednesday has been rescheduled for October 24th.