China has announced an increase in additional tariffs on US goods to 125%, effective 12 April. This change raises tariffs from 84%, further straining US-China trade relations.
Trade operations may be paused on both sides due to the current situation. The ongoing standoff has raised concerns about which entity—Trump, China, or the Federal Reserve—will give in first.
Rising Tariffs And Trade Friction
In related developments, US 30-year yields have risen to 4.91%. The potential for Trump or the Federal Reserve to intervene in support of the bond market remains uncertain.
What we see here is a further deepening of trade friction between two of the world’s largest economies. With China stepping up tariffs from 84% to a striking 125%, it marks not just a technical change in trade policy, but a hardening of stance that directly amplifies costs for importers. Tariff increases at this scale aren’t just symbolic. They make certain exports prohibitively expensive, pushing firms to either absorb the blow or pass it to consumers.
These developments are likely to unsettle traders exposed to anything resembling long-term predictability in the rates or equity-linked derivatives markets. When demand weakens and costs rise simultaneously, liquidity can thin out fast. Trade desks will notice this first—bid-ask spreads may widen, volatility may spike, and hedging might require more margin than usual. We’ve seen markets react this way before, and current conditions suggest similar reactions could be brewing in the near term.
On the rates front, the move in 30-year US yields to 4.91% is telling. Longer-dated debt tends to reflect expectations not just for Fed rate policy, but for inflation and longer-run risks too. A move like this, rising even as recession fears continue in the background, implies investors may be starting to believe that no intervention is coming fast enough to soothe tensions or slow funding pressures.
Uncertain Market Response
That said, it’s not clear whether Powell’s team will wade in to stabilise the bond market before broader concerns start spilling into credit and spreads more broadly. If rates keep rising and trade barriers stay put, then the bond market’s stability cannot be taken for granted. Anyone holding duration poses a more acute risk of mark-to-market pressure, especially if implied volatility picks up again.
For derivative traders, positioning needs to be reassessed considering potential tail events tied to policy statements or sudden escalations in negotiations. With both monetary response and trade policy unwilling to blink first, the cost of optionality, especially in longer-dated instruments, could be underpriced. We’ve already seen some desks reduce gamma exposure on short-dated contracts. It wouldn’t be surprising to see dealers ask for wider premiums if rate swings persist this week.
One thing that’s worth keeping a close eye on is liquidity drying up post-European close, when directional flows in US futures can become more erratic. Given the rising odds of unexpected headlines disrupting trend positions, we’ve started favouring trades that benefit from convexity rather than naked exposure to one-sided outcomes.
Volatility desks are also watching lower-tenor skew in rates options. Last week there was a subtle but steady steepening that caught a few participants wrong-footed. Given these moves are not yet reversed, complacency can carry costs.
As for the outlook, nothing here points to resolution. We’re not adjusting over broader expectations for easing until one of the major policy heads makes a shift. That said, there’s no reward in holding on to calendar spreads that assume stability while macro risks pile up. Swaps traders with floating legs might consider layering hedges more frequently. Better to roll protection regularly than wait for direction.
