August 2, 2018 / 2:59 PM / 2 months ago

TREASURIES-Yields edge lower as fresh trade fears inspire risk-off

NEW YORK, Aug 2 (Reuters) - Benchmark government bond yields eased lower as the market sought safety in Treasuries on Thursday morning after trade tensions between the United States and China ratcheted up once more.

China on Thursday urged the United States to “calm down” and return to reason after the Trump administration sought to increase pressure for trade concessions by proposing a higher 25 percent tariff on $200 billion worth of Chinese imports.

“We’re in risk-off mode after the back and forth between China and the U.S. on tariffs,” said Priya Misra, head of global rates strategy at TD Securities in New York. “You’re already seeing (trade tension) affect investment decisions globally, so it is a growth concern.”

Fears of an escalating trade war began showing in Asian equities markets - where the MSCI’s broad index of Asia-Pacific shares outside Japan closed 1.6 percent down, pulled by a 1.8 percent fall in Chinese H-shares - then spread to the United States.

U.S. stocks opened lower on Thursday, with the Dow Jones Industrial Average last down 167.09 points, or 0.66 percent. The S&P 500 also opened lower, last down 0.06 percent.

The move out of stocks benefited bonds, which saw prices rise and yields fall. The benchmark government note yield was last at 2.997 percent, just below 3.003 percent late on Wednesday.

Yields on shorter-dated maturities fell faster than longer ones, with 2-year note yields down 1.2 basis points from late Tuesday, steepening the yield curve. The spread between the 2- and 10-year notes was up on Thursday less than a basis point to 32.30 basis points. The spread between 5- and 30-year bonds was last at 26.8 basis points, up from 25.3 early in the session.

Yields also moved lower overnight in step with Japanese government bonds, which fell after the Bank of Japan unexpectedly bought 5-to-10-year bonds worth 400 billion yen in order to stanch a selloff that lifted the 10-year yield to its highest since February 2017. Shorter-dated bonds were hit hardest, with the 2-year Japanese note down nearly a basis point.

“The BOJ came in with this unscheduled buying operation, which tells you they’re actually very serious about pushing back against a big rise in JGBs,” said Misra.

“I think this flexible approach by the BOJ - which the market took to mean hawkish - the BOJ is telling us that it’s a two-way flexibility so it can be dovish if the market moves a lot.” (Reporting by Kate Duguid; editing by Jonathan Oatis)

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