August 28, 2018 / 2:35 PM / a year ago

CORRECTED-TREASURIES-Yields rise as NAFTA progress sparks risk-on move

(Corrects headline to say “risk-on” rather than “risk-off”)

By Kate Duguid

NEW YORK, Aug 28 (Reuters) - Treasury yields on Tuesday morning rose across maturities to weekly highs, as fears of a global trade war abated a day after the United States and Mexico reached agreement on an overhaul the North America Free Trade Agreement (NAFTA).

Easing trade tensions prompted investors to reduce safe-haven positions in U.S. government debt. Sales of long-term Treasuries in particular pressured prices and drove yields up more on the long end of the curve, indicating more optimism about the economic outlook.

“There’s a bit of optimism on trade because of what’s going on with Mexico so far. It’s probably far from over, but it’s a very positive sign,” said Gene Tannuzzo, senior portfolio manager, Columbia Threadneedle Investments.

The NAFTA agreement between the United States and Mexico puts pressure on Canada to agree to new terms on auto trade and dispute settlement rules to remain part of the deal. Wall Street’s S&P 500 and the Nasdaq stock indexes rallied to record highs on expectations Canada would sign onto the deal and ease the economic uncertainty caused by U.S. President Donald Trump’s repeated threats to ditch the 1994 accord.

The yield on the 10-year note was up 2.2 basis points, last at 2.873 percent, after rising 2.9 basis points on Monday on the trade news. The 30-year bond yield also rose 2.5 basis points, last at 3.025 percent, after rising 2.8 basis points Monday.

The short end of the curve moved less, with the two-year note yield up less than half a basis point. This steepened the yield curve, with the spread between two- and 10-year yields up 2.6 basis points to 21.6 basis points and the spread between the five- and 30-year yields also up modestly, last at 26.0 basis points.

Tannuzzo noted that Fed Chair Jerome Powell suggested in a speech at Jackson Hole last week that the Fed “may be setting up for a pause sometime in the first half of 2019 - or at least they won’t overdo it on short-term interest rates.” That would reduce upward pressure on yields at the short end of the curve.

The market is also focused on the $37 billion auction of five-year notes at 1 p.m. EST, a $1 billion increase from July. Also auctioned on Tuesday will be $17 billion of two-year floating-rate notes at 11:30 a.m. EST. (Reporting by Kate Duguid; Editing by David Gregorio)

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