Bond Report: Treasury yields struggle to move higher as bond-market selloff takes a break

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U.S. Treasury yields held their ground early Monday in a holiday-truncated week, putting a pause to a weeks-long bond-market selloff sparked by a preliminary China-U.S. trade deal.

Analysts warned that trading volumes could grind virtually to a halt as investors vacate their offices for Christmas.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.50%   was flat at 1.917%, while the 2-year note rate TMUBMUSD02Y, +0.51%   was up 1.3 basis points to 1.642%. The 30-year bond TMUBMUSD30Y, -0.54%  edged 0.6 basis point lower to 2.340%.

The Securities Industry and Financial Markets Association recommends bond-trading to end at 2 p.m. Eastern on Tuesday, and for the market to close altogether on Wednesday.

See: Here’s when markets will be closed for Christmas and the New Year

What’s driving Treasurys?

Over the weekend, China cut tariffs on U.S. goods including frozen pork and other consumer items starting on Jan. 1, according to state-run Xinhua News Agency, an indication that a phase one trade deal is near. Risk sentiment has improved since the announcement of the preliminary tariff agreement, helping to spur major stock benchmarks to new heights.

Futures for the S&P 500 SPX, +0.49%   and the Dow Jones Industrial Average DJIA, +0.28%   point to a slightly higher open for Wall Street on Monday.

Read: Stock market set to carve out fresh records to start Christmas week trade

Investment spending has taken a hit since the onset of trade tensions between the two largest economies in the world, and could be set to recover once the U.S.-China trade spat starts to de-escalate. But Boeing’s halt to new production of their 737 MAX plane could hamstring a recovery in capital expenditures, and inflict broader damage to the economy.

Investors handled some important economic data, with durable goods shrinking 2% in November, the largest drop in six months. A key data subset of the report, core capital goods shipments, which excludes volatile defense and aircraft spending, was down by a more modest 0.3%. New home sales numbers from November will later be released at 10 a.m.

Treasury issuance will also receive some attention, with an auction for $40 billion of 2-year notes due at 1 p.m.

What did market participants’ say?

“[President] Trump and [China’s] Xi speak over the weekend and China moves to cut tariffs on pork and technology in a good faith gesture of more free trade amidst the continued trade dispute with this U.S. All indications point to a Phase 1 deal getting inked next month, although this recent move was more broad based and not necessarily aimed toward the U.S.,” wrote Gregory Faranello, head of U.S. rates for AmeriVet Securities, in a note.

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