J.P. Morgan Chase strategists cut their forecast for the benchmark 10-year Treasury yield to 1.75% at year-end, after President Donald Trump's threat of tariffs on Mexico prompted fears that the economy will weaken further and the Fed will have to cut rates this year. The firm's prior forecast had been 2.45%.

J.P. Morgan and other firms changed their view on rate cuts following Trump's threat Thursday to slap tariffs as high as 25% on all Mexican goods. Trump said the tariffs will start at 5% on June 10 and accelerate each month, unless Mexico stops the flow of illegal immigrants from crossing the U.S. southern border.

The 10-year yield has fallen precipitously in the last several sessions, after declining through May. At the start of last month, it was at 2.55% and was as low as 2.07% on Monday. That yield is closely monitored even beyond the Treasury market, because it influences many lending rates, including home mortgages. The 30-year fixed rate mortgage has now fallen to about 3.94%.

"Until recently, our base case scenario was that the increase in tariffs would contribute to a further slowing in capex spending this year but that it would not translate to an outright deterioration in the economy. However, trade related headwinds to the growth outlook have continued to build, and our economists believe that the latest developments this week are likely to have lasting damaging effects on business confidence and should thus prompt the Fed to respond," the J.P. Morgan strategists wrote.

They said the firm expects a 25 basis point rate cut in September and another in December. The firm also trimmed its third-quarter GDP forecast by a quarter point to 1.5% growth. It expects second-quarter growth of 2%.

Bond strategists have said the Treasury market is now reacting to the idea that the trade wars are open-ended, and the president could move ahead with tariffs on other trading partners. There is also concern that the trade rift with China is deepening and will hurt the global economy.

The J.P. Morgan strategists also expect the 2-year, which more closely follows the Fed, to fall to 1.40% from its current 1.88%. The firm's prior target had been 2.25%.

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