[THE ENDGAME] : Mexican Standoff

Making good on his threats to impose tariffs on Mexico, Canada and China, President Trump sent the stock market into a tailspin this morning, while Treasury yields fell as investors rotated out of riskier assets into safer havens like Treasuries and gold. Fears that a full-blown trade war would disrupt global supply chains, reignite inflation and slow the economy sent the three major averages tumbling at the open. That rotation away from risk-on assets kept at least nine potential high-grade borrowers on the sidelines to kick off the week, a week that is expected to see $32bln price, the new month that, on average, is expected to see $170bln in new ex-SSA supply.

That resulted in the third “zero” ex-SSA issuance day of the year. There was one deal priced today, though it was an SSA. Romania raised $1.25bln via a 12yr note offering, with EIB ($3ln (WNG) 10yr) and BNG Bank (3yr notes) on tap for tomorrow.

However, shortly thereafter, it was reported that the (25%) tariffs on Mexico would be put on hold for 30 days after Mexico’s President Claudia Sheinbuam agreed to immediately supply 10k Mexican soldiers on the border separating Mexico and the US. The stay of the tariffs on Mexico was further proof that Trump is using the imposition of tariffs as a negotiating tool. He is apparently in the process of working out a deal with Canada, after a series of phone calls, which could lead to a postponing their proposed tariffs as well as negotiations continue.

With that in mind, cooler heads prevailed, and the three major averages staged a massive comeback, with the Dow closing off 123 points after trading more than 650 points lower from the get-go. The same can be said for the S&P500, which opened the day 1.5% lower, ultimately closing 0.45% lower, while the Nasdaq lagged closing 1.20% lower, though it was also down as much as 2.5% at the peak of the selloff. The move back into risk sent Treasury yields higher after hitting seven-week lows, though yields on the long end of the curve were still lower on the day. The benchmark 10yr note closed at 4.54%, better by 4bp on the day, though it did trade as low as 4.48% intraday, while the long bond yield was also 4bp lower on the day, closing at 4.77%, again, off its lows of the Day (4.73%).

It was a different story on the short end where the 2yr note saw its yield move 4bp in the opposite direction, closing at 4.26%. It should be noted that the Treasury Department announced it plans to raise $815bln in the first quarter, substantially more ($620bln) it raised in the fourth quarter of 2024.

While the high-grade primary market was devoid of any issuance, there was no such hesitation on the part of high-yield borrowers, as five firms tapped the market for a much needed $3.474bln. After high yield issuance in 2024 outpaced 2023 by 62.7% ($287.635bln vs $176.78bln), year-to-date, this year’s issuance is running 31.7% ($24.369bln vs $35.67bln) behind last year.

The high number of stand downs today, could make for a very crowded calendar tomorrow in the high-grade market as the dust settles and prospective borrowers jockey for position before several key labor-centric economic releases. Tomorrow will present the market with the latest JOLTS report (8000k followed by the ADP private payrolls report (150k) on Wednesday. That will be followed on Thursday with the weekly initial jobless claims (213k), and continuing claims (1870k), culminating with the January jobs report (170k) of Friday, not to mention a slew of manufacturing data.

If you recall, after the latest FOMC policy meeting, Fed Chair Powell said the labor market remains in solid condition and the committee is squarely focused on “maximum employment” making this week’s data all that more important. As DoubleLine’s Jeffrey Gundlach described it, “It appears we’re at the height of data dependency.”

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