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The United States Treasury market experienced a significant rally following President Donald Trump's decision to refrain from imposing tariffs on China and revoke offshore oil drilling bans in most coastal waters. These moves alleviated concerns about inflation and increased expectations for interest rate cuts by the Federal Reserve. Analysts noted that this shift could lead to lower inflation, Fed rate cuts, and a drop in Treasury yields. The 10-year Treasury yield fell close to 10 basis points to 4.53% in Asia, supported by falling crude prices after the revocation of offshore drilling bans. Investors are now pricing in more policy easing from the Fed, with a 70% chance of multiple rate cuts this year. This development comes after Treasuries suffered their worst quarterly performance in two years due to concerns over Trump's policies driving up inflation.

In a strategic move that has calmed market anxieties, President Trump decided not to impose immediate tariffs on Chinese goods and declared an energy emergency, effectively opening up most US coastal waters for offshore drilling. These actions have significantly reduced worries about rising inflation. Makoto Noji, chief FX and foreign bond strategist at SMBC Nikko Securities Inc., observed that the path towards lower inflation, Fed rate cuts, and declining Treasury yields is becoming increasingly likely. The market responded positively to these developments, with the 10-year Treasury yield dropping sharply as cash trading resumed after a holiday break. Additionally, the removal of offshore drilling restrictions contributed to lower crude oil prices, further supporting the bond market rally.

Investors had been concerned that higher tariffs and tax cuts would boost US inflation, potentially preventing the Federal Reserve from easing monetary policy. However, the recent policy changes have shifted these expectations. Naokazu Koshimizu, a senior rates strategist at Nomura Securities Co., noted that while US yields could rebound if speculation of Fed policy easing decreases and the economy remains resilient, sustained declines in yields would require tighter financial conditions leading to economic slowdown. The market is now pricing in a 70% chance of multiple Fed rate cuts this year, up from 46% just days ago.

The positive momentum in the Treasury market was briefly interrupted when Trump announced plans to enact tariffs on Mexico and Canada by February 1st. Nonetheless, the overall sentiment remains optimistic about continued policy easing from the Federal Reserve. The market's response to these policy shifts underscores the delicate balance between economic resilience and the need for monetary adjustments to maintain stability. As investors continue to monitor these developments, the trajectory of US yields will be closely tied to the interplay between inflation expectations and Fed policy decisions.