Treasuries climbed after U.S. President Donald Trump revived his attack on China, speculating it could have spread the coronavirus and threatening trade tariffs.

Haven demand pushed U.S. bonds higher along with the dollar and yen. Benchmark yields headed for their first drop in three days, with dismal corporate news and deteriorating economic data adding to the gloom. Trump was also said to be exploring blocking a government retirement fund from investing in Chinese equities on grounds of it being a security risk.

This is shifting focus from the virus back to a potential breakdown in relationship between the world’s two largest economies, according to Peter Chatwell, head of multi-asset strategy at Mizuho International Plc.

“If this escalates then it can cause material harm to sentiment, and flatten U-shaped recovery hopes to more of a L-shape,” London-based Chatwell said. “I would expect this to drive a large bout of risk-off, pushing U.S. Treasury yields lower, and may also mean the Federal Reserve increases its monetary support, having slowed it from its recent peak.”

Yields on longer-dated bonds fell further, flattening the curve, with those on 10-year Treasuries down three basis points to 0.61% as of 12:00 p.m. in London. A gauge for the dollar rose as much as 0.4%, poised to end its longest losing run in a month, with the greenback up 0.6% against the offshore yuan.

Mizuho’s Chatwell sees U.S. 10-year yields falling to 0.25% by July, even without a flare up in the trade war.

If the dispute is reignited, “zero would not be far away, but I would expect the more significant impact would be to flatten the U.S. Treasury curve down to distressed levels,” he said.

A trade war couldn’t come at a worse time, analysts said, given the global economy is grappling with recessionary fears. The pandemic has severely hampered supply chains and hurt otherwise robust businesses. Inc. saw profits shrink and warned it may incur a loss.

Uncertainty created by U.S.-China trade spats will lower global gross domestic product by 0.6% by 2021 relative to a no-trade-war scenario, Bloomberg Economics predicted last September, before the pandemic shuttered the global economy.

“The last thing the financial market needs now as it grapples with COVID-19 is a renewal of the trade war between the U.S. and China,” said Derek Halpenny, the head of global market research at MUFG. “Given the scale of the COVID-19 impact there is certainly a high risk of geopolitical tensions escalating considerably as lockdowns reverse, and now this could include the U.S. imposing additional trade tariffs on China.”

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