August 9, 2019 / 8:56 PM / 4 months ago

TREASURIES OUTLOOK-U.S. bond yields rise on confusion over U.S. trade move

    * U.S. keeps ban on government business with China's Huawei
    * U.S may let firms trade with Chinese telecom firm
    * Italy's political woes rattle confidence on euro zone

 (Repeats to additional subscribers)
    By Richard Leong
    NEW YORK, Aug 9 (Reuters) - U.S. Treasury yields rose on
Friday amid confusion over the United States policy on trade
with China, while political turmoil in Italy compounded investor
concerns, capping a volatile week in the bond market.
    Treasury yields fell for a second week, though they stayed
above the multi-year lows set on Wednesday when the yield on the
30-year bond came within striking distance of a record low.
    Adding to investors' jitters was news that the British
economy unexpectedly contracted in the second quarter, the first
time since 2012, as Prime Minister Boris Johnson prepares to
pull the country out of the European Union in October.

    "Global economic data continue to trend lower. We like bonds
as a diversifier," said Bill Merz, head of fixed income research
at U.S. Bank Wealth Management in Minneapolis.
    Trade tensions between China and United States remain the
main driver for financial markets.
    President Donald Trump said on Friday the United States is
not going to do business with Chinese telecom giant Huawei. His
comments supported an earlier Bloomberg report that said
Washington was delaying a decision to allow some trade between
U.S. firms and China's telecom equipment maker Huawei again.

    Trump's remarks were seen as the latest U.S. move pushing
the world's two biggest economies toward a full-blown trade war
that could spark a global downturn and stoke more turbulence in
financial markets. 
    Wall Street shares fell and pushed bond yields lower.
    Bond yields reversed to move higher after Fox Business
reporter Edward Lawrence posted a tweet citing a White House
official saying that Trump meant "ONLY the ban on Federal
Departments buying from Huawei. White House Official says
Commerce Dept Process for special licenses still going forward."
    "It created a whole level of uncertainty and that's not
good," said Mary Ann Hurley, vice president of fixed income at
D.A. Davidson in Seattle. 
    Worries about Italy, the euro zone's third biggest economy,
were rekindled late on Thursday after its deputy prime minister,
Matteo Salvini, sought snap elections following a period of
public fighting between Salvini's League party and coalition
partner the anti-establishment 5-Star Movement.
    In late U.S. trading, benchmark 10-year Treasury yields
 were 2.1 basis points higher at 1.736%. They hit
1.595% on Wednesday, which was their lowest level since October
    Ten-year yields fell for a second week, marking their
steepest two-week drop in nearly eight years, according to
Refinitiv data.
    The yield on the 30-year, or long, bond was up
0.9 basis point at 2.256%. On Wednesday, the 30-year yield fell
to 2.123%, within striking distance of the all-time low of
2.089% set in July 2016, according to Refinitiv data.
    Longer-dated yields were supported earlier by data that
showed U.S. domestic producer prices grew modestly in July, with
core prices posting their first decline since October 2015.

    Sluggish inflation, together with trade and geopolitical
turmoil, reinforced traders' expectations the Federal Reserve
will lower its key lending rate by at least a quarter point at
its next policy meeting, on Sept. 17-18.
    Interest rates futures implied traders expect the U.S.
central bank may cut rates at each of its remaining policy
meetings this year, according to CME Group's FedWatch program.
August 9 Friday 4:13PM New York / 2013 GMT
 US T BONDS SEP9               161-8/32     -10/32    
 10YR TNotes SEP9              129-180/256  -7/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.9575       1.9941    -0.029
 Six-month bills               1.9025       1.9526    -0.010
 Two-year note                 100-58/256   1.6324    0.015
 Three-year note               99-204/256   1.5696    0.025
 Five-year note                100-228/256  1.5629    0.026
 Seven-year note               101-136/256  1.6415    0.026
 10-year note                  99           1.7344    0.019
 30-year bond                  99-244/256   2.2522    0.005
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       9.90         0.45      
 30-year vs 5-year yield       68.80        1.05      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        -1.50         1.50    
 U.S. 3-year dollar swap        -4.00         1.25    
 U.S. 5-year dollar swap        -7.25         1.00    
 U.S. 10-year dollar swap      -12.00         1.50    
 U.S. 30-year dollar swap      -41.75         1.25    

 (Reporting by Richard Leong; Editing by Leslie Adler)
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