It’s the same old theme, since 1916 — Dolores O’Riordan, of Irish band The Cranberries, perhaps got the year wrong, but nevertheless got the idea right when she sung that history repeats itself. For better or worse, tariffs have been used for hundreds of years by the U.S. government. Consider a brief history lesson on America’s early use of tariffs, courtesy of Wikipedia:
After the United States achieved independence in 1783, under the Articles of Confederation, the U.S. federal government could not collect taxes directly but had to “request” money from each state. The power to levy taxes and tariffs, when proposed by the United States House of Representatives, was granted to the federal government by the United States Constitution after it came into effect in 1789. The new government needed a way to collect taxes from all the states that was easy to enforce and had only a nominal cost to the average citizen. The Tariff of 1789 was the second bill signed by President George Washington imposing a tariff of about 5% on nearly all imports, with a few exceptions. In 1790 the United States Revenue Cutter Service was established to primarily enforce and collect the import tariffs.
From 1871 to 1913, “the average U.S. tariff on dutiable imports never fell below 38 percent [and] gross national product (GNP) grew 4.3 percent annually, twice the pace in free trade Britain and well above the U.S. average in the 20th century,” notes Alfred Eckes Jr, chairman of the U.S. International Trade Commission under President Reagan.
What distinguishes President Trump from his early predecessors is his emphasis on tariffs as a negotiating tool, rather than as a revenue-raising tool (recall that America did not have an income tax until 1913.) Today, as part of these negotiating efforts, Trump directed his administration to develop a plan to impose tariffs on numerous nations. The executive order, signed last Thursday, orders U.S. Trade Representative and Commerce Secretary Howard Lutnick to propose new tariffs on a country-by-country basis. Lutnick suggested that he should be able to get back to the president with a proposal by April 1.
The market was fairly ho-hum about the executive order. The reason for this was likely because the order was a nod to a familiar (and, in Trump’s case, expected) theme—as well as an acknowledgment that the timeline for enacting additional tariffs is far enough in the future that there is not yet reason to price anything in today.
The market did have a moment of panic, however, following the release of the Consumer Price Index (CPI) on Wednesday. The Bureau of Labor Statistics reported that inflationary pressures unexpectedly increased from 0.4% to 0.5% in January, compared to a forecasted decline down to 0.3%. Core inflation also rose on both a monthly and yearly basis. In response, the 10-year Treasury sold off by 12 basis points (bps), pushing the yield from 4.54% to 4.66%. And despite the Producer Price Index (PPI) also coming in hotter than expected on Thursday, domestic interest rates steadily fell for the remainder of the week, as calmer heads prevailed.
Figure 1 shows how end-of-year federal funds rate futures started the week at a yield of 3.965%, before spiking to 4.075% at Tuesday’s close—suggesting that fewer cuts from the Federal Reserve are on the horizon. But by the end of the week, the same contract closed at about where it began (3.94%), indicating that no material changes occurred in the weekly slate of information.
All told, the market ended last week at roughly the point where it started: The 10-year Treasury began the week at 4.49% and ended at 4.48%, while expectations for monetary policy ended the week unchanged. From tariffs to spending cuts to deregulation, the Trump administration is clearly considering major policy changes. But for now, as The Cranberries might have sung, it’s still only in your head, where they are fighting.
FROM THE DESK
Agency CMBS — There is not much to report, week over week. Ginnie Mae spreads were mostly flat, while Fannie DUS loans were flat to two bps tighter. Longer-duration loans (12+ years) received more interest from some investors; compression of the basis between their shorter-duration counterparts amounted to nearly zero.
Municipals — AAA tax-exempt yields were higher throughout the yield curve, week over week. The housing sector remained fairly light in terms of issuance, with several cash-collateralized deals pricing last week. Though it’s still unclear if the tax-exemption will survive for municipal bonds, the municipal bond market has handled the uncertainty fairly well over the last month—money continued to flow into mutual funds and deals priced at levels that attracted multiple investors. Finally, municipal bond funds had their fourth straight week of inflows, with $239 million entering (YTD inflows of $4.31 billion). Meanwhile, high-yield funds saw inflows of $313 million last week.
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