While investors try price in the impact of U.S.-China trade frictions, President Trump unexpectedly announced new tariffs on Mexico. Late Thursday, the president said he will levy a 5% duty on all goods coming from Mexico, potentially rising to 25% by October.
The president said tariffs will be removed if Mexico takes “effective action” to deal with “the illegal migration crisis.” Not surprisingly, the sudden move sent stocks lower on Friday amid anxieties the new barriers will impede U.S. commerce.
The economic uncertainty has been a boon to long-term U.S. Treasuries. Earlier in the year, a shift at the Fed brought yields down. Lately, China (and now Mexico) fears have encouraged additional cash inflows into the safety of government bonds – see Figure 1 (bond prices and bond yields move in opposite directions).