U.S. government bond yields approached their lowest levels of the year after President Donald Trump refrained from immediately implementing tariffs and oil prices declined, easing inflation concerns.

Most yields remain lower by several basis points despite rebounding from session lows reached during Asian trading hours. The 10-year note’s is around 4.57% after falling nearly 10 basis points to 4.53%.

Trump so far has held off on China-specific tariffs while saying Mexico and Canada will face 25% levies from next month, which sent currencies from both countries tumbling over 1%. The volatility in markets is a glimpse of the months to come as the new administration rolls out policy changes. US bonds took a beating in the lead-up to Monday’s inauguration on fears sweeping tariffs and tax cuts would drive up inflation, and policy signals triggered wild swings in assets worldwide.

“Trump’s message on energy was strong as expected, which will be good for lower prices in the short term,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “In Trump 1.0 we had low overall energy prices and little inflation. In addition, the evidence of tariffs and inflation is not conclusive.”

Oil prices declined for a third straight day, related to the tariff threats on Mexico and Canada. Also, Trump revoked offshore oil and gas leasing bans that effectively blocked drilling in most US coastal waters. The US benchmark crude oil futures contract was down about 2% after falling more than 3%.

The Treasuries rally added to an advance unleashed Dec. 15 by benign US inflation data. The 10-year note’s yield retreated after topping 4.8% for the first time in more than a year.

“We expect further declines in Treasury yields,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, who sees 10-year yields at 4% by mid-2025. He expects tariffs won’t prevent inflation continuing to fall, allowing the Federal Reserve to cut rates by half a point this year.

Investors have added slightly to wagers on Fed policy easing, with overnight-indexed swaps signaling a 52% chance of more than one rate cut this year, up from 46% on Friday.

“Markets were fixated on big tariffs bazookas from day one,” said Shoki Omori, chief global desk strategist at Mizuho Securities. “The absence of that, especially on China, is driving a relief rally for Treasuries.”

Still, market participants including ING and Nomura see Tuesday’s rally as only a temporary respite from the march higher in yields. Treasuries lost 3.1% in the final three months of 2024, the worst quarterly performance in two years.

“We still argue for higher US rates from a structural perspective,” wrote ING rates strategists including Michiel Tukker in a note. “Plenty of Trump’s intended policy measures are inflationary, and failing to address the growing deficit adds to the upward pressure for UST yields.”

In currency markets, the fact Trump pressed on with tariffs on Mexico and Canada was enough to keep boosting the dollar, showing how traders will need to pay attention to the nuance of Trump’s headline policies.

A Bloomberg gauge of the greenback rose as much as 0.7%, and all Group-of-10 currencies fell, reversing the index’s steepest drop in 14 months seen on Monday.

The tariffs announcement also led some hedge funds to re-enter bullish dollar option trades on Tuesday, having exited similar positions just hours earlier.

“Welcome to the roller-coaster,” said Kit Juckes, chief FX strategist at Societe Generale, who sees the dollar remaining strong, though warns the high plain will be “bumpy” territory.

--With assistance from Ruth Carson and Masaki Kondo.