Treasury Yields Hesitate as US-China Trade Talks Approach

The U.S. 10-year Treasury yield hovered near 4.37% on May 10, 2025, as investors weighed the implications of high-stakes trade talks between the U.S. and China set to begin the following day. While the yield remained stable intraday—briefly dipping to 4.36% after President Trump’s remarks on tariff reductions—it underscored a market caught between cautious optimism and lingering uncertainty. With the talks in Geneva poised to shape global trade dynamics, Treasury markets find themselves at a crossroads, balancing hopes for de-escalation against entrenched economic and geopolitical tensions.

Current Yield Environment: A Delicate Balance

The 10-year yield had climbed 5.6 basis points over the prior week, reflecting a broader rise in risk appetite as trade optimism briefly outweighed concerns about inflation. However, the yield’s proximity to 4.37%–4.38% highlighted fragile investor sentiment. Fed funds futures now priced a 60% chance of a July 2025 rate cut, down from 75% earlier in the month, as tariff-related risks overshadowed domestic inflation data.

Trade Talks: Key Players and Stakes

The May 11 talks in Geneva brought together senior negotiators from both nations. For the U.S., Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer emphasized de-escalation as the primary goal, aiming to reduce tariffs from their current 145% peak. Bessent called the tariffs “not sustainable” and akin to an embargo, signaling openness to gradual rollbacks. China’s delegation, led by Vice Premier He Lifeng, approached negotiations cautiously, demanding the full removal of U.S. levies but signaling flexibility if the U.S. demonstrated “sincerity.”

The talks’ agenda centered on five critical areas:
1. Partial Tariff Rollbacks: Analysts project the U.S. could lower its effective tariff rate on Chinese goods from 107% to ~45% by year-end, but China insists on complete removal.
2. Critical Minerals Access: The U.S. seeks to address China’s export controls on rare earths and gallium, vital for semiconductors and clean energy.
3. U.S. Treasury Holdings: China’s $800 billion in Treasuries could become a bargaining chip, though selling them risks yuan appreciation and capital losses.
4. Fentanyl-Linked Tariffs: A potential 20% tariff reduction hinges on China’s cooperation in curbing precursor chemical trafficking.
5. Market Access and Compliance: The U.S. presses China to honor past commitments, such as unmet Phase One trade targets, while Beijing resists structural reforms to its state-driven economy.

Market Implications: A Fragile Equilibrium

The outcome of the talks could sway Treasury yields significantly:
- De-escalation Scenario: A partial tariff rollback or expanded exemptions might push the 10-year yield lower, potentially to 4.25%, as risk assets rally and inflation expectations ease.
- Stalemate Scenario: A failure to resolve tariff disputes could reignite fears of a global recession, boosting demand for Treasuries and driving yields below 4.30%.
- Escalation Scenario: Should tensions worsen—e.g., new tariffs or a Chinese Treasury sell-off—yields might climb toward 4.50%, reflecting inflationary pressures and geopolitical risk.

Conclusion: Navigating Uncertainty

The Treasury market’s hesitation reflects a broader truth: while the Geneva talks offer a rare opportunity to reduce trade tensions, meaningful progress remains elusive. With the 10-year yield stuck near 4.37%, investors face a landscape where strategic patience outweighs bold bets. Key data points reinforce this outlook:
- Economic Pressures: The U.S. economy shrank by 0.3% in early 2024, while China’s growth slowed to 4%, below its 5% target. Both nations risk further contraction if tariffs persist.
- Mutual Dependency: The U.S. imports 97% of its baby carriages and 95% of fireworks from China, while Beijing relies on U.S. markets despite diversification efforts.
- Fed’s Dilemma: The central bank’s “wait-and-see” stance leaves rate cuts contingent on trade outcomes, not just inflation.

In the end, Treasury yields are unlikely to trend decisively until the talks clarify the path forward. For now, investors are best served by hedging risks—perhaps through shorter-dated Treasuries or inflation-protected securities—while awaiting a resolution that could redefine the global economic order. The stakes, as the market’s hesitation shows, could not be higher.