Bond Report: Treasury yields sag on signs of softening economic activity in Europe

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U.S. Treasury yields ticked lower on Friday, capping a week long decline, as a round of purchasing managers’ surveys indicated a slowdown in business activity across the U.K. and the eurozone.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -1.11%   fell 2.4 basis points to 1.748%, while the 2 -year note rate TMUBMUSD02Y, -0.74%   was down 1.4 basis points to 1.591%. The yield for the 30-year bond TMUBMUSD30Y, -0.93%   slipped 2.8 basis points to 2.203%.

What’s driving Treasurys

There was some sign of improvement in Germany’s manufacturing sector, but IHS Markit’s purchasing managers indexes for the euro area pointed to slow economic growth.

The U.K.’s economic performance was the worst since July 2016 with manufacturing and services PMI both coming in below 50 and below expectations. Britain faces a general election on December 12.

PMI data for the U.S. economy due at 9:45 a.m. Eastern Time.

The 10-year German government bond yield TMBMKDE-10Y, -10.28%   was down 2.7 basis points to negative 0.357%. Trading in German debt can serve as a proxy for haven demand within the eurozone, and often moves in sync with the Treasurys market.

In other U.S. economic data, the University of Michigan’s consumer sentiment index for November is due at 10 a.m. ET.

On prospects for a U.S. – China trade deal, Chinese President Xi Jinping said Beijing wanted to work toward a phase-one agreement on the “basis of mutual respect and equality. Xi added that though China neither began nor wanted a trade war, China would fight back when necessary.

Meanwhile, legislation on Hong Kong that allows for the U.S. to rescind Hong Kong’s special status is now being passed to President Donald Trump, but it’s not clear if the White House will attempt to veto the bill in order to advance trade talks with China. With the bill seeing significant bipartisan support, a veto would likely to be overturned, analysts said.

What did market participants’ say?

“Risk appetite had taken a notable hit from Congress fast-tracking the passage of the Hong Kong Human Rights and Democracy Act – this legislation threatening to create a significant additional obstacle to the U.S. and China even agreeing to the hollowed-out phase one deal currently on the table,” wrote analysts at Rabobank.

“Risks to the global trade outlook remain; we still have no signatures under the phase one deal between the U.S. and China and elections in the U.K. could determine the fate of the Brexit deal. Without some of these threats off the table, it is tough to see the eurozone rebounding in the coming months. The winter months will, therefore, be a nail biter for eurozone growth,” noted Bert Colijn, senior economist for the eurozone.

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