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Podcast: What’s next for Chinese equities and the USD? (12 min)

Thought of the day

US Treasury yields rose across the curve on Wednesday after private payrolls rebounded more than expected, while Supreme Court justices expressed skepticism over the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to levy tariffs. The 10-year Treasury yield rose by 7 basis points to 4.16%, the highest level in a month.

The ADP report showed a 42,000-job increase in October, above the consensus forecast of a 28,000 rise. This reading has further reduced market expectations for a December interest rate cut, after Federal Reserve Chair Jerome Powell last week said such a move is not a foregone conclusion. While ADP releases usually play second fiddle to the official Bureau of Labor Statistics employment report, the ongoing US government shutdown has added extra significance to this gauge of labor market health.

Meanwhile, media headlines noted skepticism among Supreme Court justicies over the legality of tariffs based on the IEEPA after nearly three hours of oral arguments on Wednesday. If the IEEPA tariffs are indeed declared unlawful, we estimate the US government could be forced to refund USD 130-140bn of tariff revenue. The potentially worsened US fiscal outlook has added to the upward pressure on Treasury yields.

However, we expect yields to come down, forecasting the 10-year yield to reach 3.75% by June 2026. We maintain the view that quality medium-duration government and investment grade corporate bonds remain a critical component of a resilient portfolio.

The Fed remains likely to press ahead with its rate-cutting cycle. Despite Powell’s cautious rhetoric at the October policy meeting, we believe the US c entral bank will cut rates twice more by early 2026. The absolute level of job growth suggested in the ADP report remains low, and the latest ISM services PMI still indicates a contraction in employment. We think evidence of a cooling labor market will continue to mount, and recent inflation readings have not been sufficient to shift the Fed’s focus away from the weakening demand for workers. Further rate cuts should lead to a decline in Treasury yields.

Potential tariff refunds should only amount to a negligible fiscal boost, limiting upward pressure on yields. Because of the expansiveness of the IEEPA tariffs, the Supreme Court ruling would affect roughly 70% of the tariff revenue that the administration has collected this year. However, whether the ruling will result in refunds remains to be seen. The exact amount of tariff revenue subject to refunds also depends on the ruling’s date, its applicability, and procedural limitations for filing protests. Our estimate of USD 130-140bn in refunds would be equivalent to about half a percent of estimated 2025 GDP—a relatively small fiscal boost, in our view. This should limit the upward pressure on yields, even though concerns over fiscal sustainability may persist.

The administration remains committed to containing yields. The US Treasury indicated that it is not looking to boost sales of notes and bonds until well into next year, and that it will increasingly rely on short-term bills to fund the budget deficit. In its quarterly refunding statement on Wednesday, the department said it will keep auction sizes unchanged for nominal notes, bonds, and floating-rate notes for “at least” the next several quarters. Given the level of control the US government has over bond supply, we believe any significant rise in bond yields is likely to be contained. Additionally, the Fed’s proposal to lower Supplementary Leverage Ratio (SLR) requirements could unlock USD 200-500bn in bank capital that could be used to absorb Treasury issuance.

So, with yields still attractive and likely to fall, we continue to believe that quality fixed income offers an appealing combination of income and the potential to perform well in the event of slowing economic activity and further rate cuts. Income-based investors can also consider equity income or yield-generating structured strategies to improve cash returns.