Bond Report: Treasury yields tick higher on trade optimism

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U.S. Treasury yields rose Monday amid reports that talks between U.S. and Chinese trade negotiators were making progress towards a phase one deal.

What are Treasurys doing?

The 10-year Treasury yield TMUBMUSD10Y, -0.38% was up 2.1 basis points to 1.855%, while the 2-year note rate TMUBMUSD02Y, -1.77% rose 1.7 basis points to 1.629%. The 30-year bond yield TMUBMUSD30Y, +0.00% edged 1.9 basis points higher to 2.330%.

What’s driving Treasurys?

The bond-market came under pressure after Chinese state media outlet Xinhua described talks between Vice Premier Liu He, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer as “constructive.” White House economic adviser Larry Kudlow said last Thursday both sides were getting closer to an agreement.

Futures for the S&P 500 SPX, +0.95% and the Dow Jones Industrial Average DJIA, +0.80% pointed to a modestly higher open for Wall Street. Stock-market benchmarks set new records last Friday.

See: With Dow above 28,000 are investors ignoring a ‘material deterioration’ in the global economy?

As for the Federal Reserve, Cleveland Fed President Loretta Mester will speak at the University of Maryland at 12 p.m. Eastern.

In the afternoon, the widely-monitored Treasury International Capitol report will be released at 4 p.m. Eastern, offering significant clues on the investment activity of overseas bondholders.

Elsewhere, China’s central bank on Monday lowered a key funding rate for the first time since October 2015, to 2.5% from 2.55%, indicating that the People’s Bank of China was taking steps to stimulate lending in the second largest economy in the world.

What did market participants’ say?

“We could be in a trade limbo for quite a while were markets expect a deal and expect the Dec. 15 tariffs to be delayed, with hope spurred on weekly if not daily by ‘constructive’ phone calls and Kudlow comments that we are ‘getting close.’” said analysts at NatWest Markets.

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