by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our takeaways from the first day of US-China trade talks. We then turn to fixed income and examine the drivers behind the 30-year Treasury yield’s move to 5%. Next, we briefly cover Federal Reserve Chair Warsh’s confirmation, the latest signs of rising US-Iran tensions, and the emerging controversy surrounding Brazil’s right-wing candidate Flávio Bolsonaro. As always, we include an overview of recent domestic and international economic data.

The China Trip: The Trump administration arrived in China for a two-day summit on Thursday. The White House is aiming to reset the US-China trade relationship, a central source of friction between the two countries in recent years. Ahead of the talks, President Trump has reiterated his push to expand US access to Chinese markets. Meanwhile, Beijing has outlined four red lines for talks, including its position on Taiwan. As the world’s two largest economies convene, the outcome of these discussions is poised to be a major catalyst for markets.

• Following a two-hour meeting, early discussions between the two sides appear to have been focused on energy and Iran. According to a US readout, officials specifically raised the prospect of China increasing purchases of US energy as part of a broader effort to diversify away from Middle Eastern supply. Both sides also emphasized the importance of keeping the Strait of Hormuz open to commercial traffic, underscoring the shared interest in maintaining stability in the waterway.
• Ahead of the talks, Beijing outlined four red lines for the US, which were Taiwan, democracy and human rights, political systems and governance, and China’s right to development. While it remains uncertain how US officials will navigate these constraints, President Trump acknowledged that the Taiwan issue could surface during discussions. However, he downplayed its importance to the US, suggesting it is a higher priority for China than for Washington.
• Markets are closely watching these talks, as much of the recent rally has been driven by optimism that trade ties, particularly in technology, could be reinforced. The Nasdaq has significantly outperformed the S&P 500, supported by expectations that the US may secure greater access to critical Chinese minerals, bolstering confidence in the durability of the AI cycle. Semiconductor stocks have also rallied on hopes that export restrictions could ease, potentially allowing US chipmakers to expand sales into China.
• The recent market rally is likely to continue as long as investors see meaningful progress in the talks. However, any sign of stalled momentum could quickly reverse market direction. While we view continued progress as the more probable scenario, a wrong call could trigger a swift market reaction. Against that backdrop, we still advocate for maintaining exposure to value for capital preservation should sentiment deteriorate abruptly.

Bond Retreat: The 30‑year Treasury yield climbed to about 5%, its highest level since 2007, driven by rising inflation expectations and a Treasury auction that tailed amid weak demand. We think the rise is largely due to market rotation. Rather than moving into safe haven bonds, many investors shifted toward large cap technology stocks as an alternative duration play. The move is reminiscent of what the market did in 2023 and 2024 and reflects the market’s growing concern about a possible shift in Fed policy due to a re-acceleration of inflation.

• Rising long‑duration bond yields appear to be a response to mounting inflation fears, with investors demanding higher compensation to hold government debt. Recent producer price data showed input costs accelerating at their fastest pace in roughly three years, reinforcing the view that inflationary pressures are re‑emerging. Much of this pickup has been linked to the war in Iran, which has driven a sharp increase in energy prices and pushed up related costs in transportation and warehousing.

• Investor wariness toward US long-duration debt was evident in Wednesday’s Treasury auction. The 30‑year bond drew a relatively soft bid, clearing at a high yield of 5.046%, only modestly above the when‑issued level of 5.041%. This marked the third underwhelming sale of the week, following lukewarm demand for both the 3‑year and 10‑year notes, reinforcing signs that investors are increasingly shunning US fixed income in favor of alternative assets.
• Investor concerns about inflation have pushed money back into leading technology names, as investors seek relative safety in companies with strong earnings track records. The sector also got a lift on Wednesday amid reports that the Trump administration has invited major US tech leaders to join talks with China on a potential “grand bargain,” aimed at preserving these firms’ access to both markets even as the two economies gradually pull back from one another.
• The recent rotation out of fixed income and into equities appears to be driven by investors seeking protection from tighter Fed policy. However, this positioning may prove short-lived if rate expectations moderate. Any signs of a potential rate cut could prompt investors to broaden their exposure toward lesser-known names, as a return of easier Fed policy would encourage risk-taking. In this context, we continue to favor value as a longer-term allocation, particularly as a hedge against lingering AI-related risks.

New Fed Chair: Kevin Warsh was confirmed to lead the Federal Reserve on Friday, securing the position with a 54-45 Senate vote — a relatively narrow margin for such a role. His confirmation likely means Jerome Powell will now serve as a Fed governor, a shift that could unsettle bond investors who fear the central bank may become less independent. We expect Warsh’s appointment to bring some volatility to bond markets as investors assess how he will handle rising inflation amid White House pressure for lower interest rates.

Fragile Ceasefire: Tensions between the US and Iran escalated on Wednesday after a commercial vessel was seized near the United Arab Emirates. The unidentified ship now appears to be heading toward Iran, underscoring the persistent challenges with shipping through the Strait of Hormuz, which is at the heart of the global energy crunch. Rising friction between Washington and Tehran is likely to put renewed upward pressure on oil prices as investors grow more concerned about future supply and a possible return to fighting.

Brazil Elections: Right-wing candidate Flávio Bolsonaro has been linked to disgraced banker Daniel Vorcaro — a connection that has raised fresh doubts about his prospects in the upcoming election. Vorcaro is currently jailed for his role in bank fraud, and although Bolsonaro has denied any wrongdoing, saying their relationship stemmed from discussions about financing a film about his father, the association is still seen as politically damaging. In the wake of the report, the Brazilian real weakened as investors reassessed the political risk backdrop.

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