Financial Market Implications of Trade War

Abstract

The trade war between the United States and China has a significant impact on high-yield spreads, long-term interest rates, and stock prices. However, the 10-year-minus-2-year Treasury yield spread, whose inversion generated significant media chatter about a looming recession, does not seem to be influenced by news about the trade war. These results are consistent with the relatively modest macroeconomic impact of the trade war predicted by previous studies and suggest that the financial-market impact is primarily driven by changes in risk premia.