January 8, 2019 / 2:29 PM / 5 months ago

TREASURIES-Yields rise as trade deal optimism boosts risk sentiment

    * Trump tweets that China trade talks are going well 
    * Treasury to sell $38 bln three-year notes on Tuesday
    * Higher U.S. stock futures trim demand for low-risk

    By Karen Brettell
    NEW YORK, Jan 8 (Reuters) - U.S. Treasury yields rose for a
third day, in line with higher U.S. stock futures, as optimism
over a trade deal between the United States and China boosted
risk appetite, while the Treasury Department also prepared to
sell new supply.
    U.S. Commerce Secretary Wilbur Ross predicted on Monday that
Beijing and Washington could reach a trade deal that "we can
live with" as dozens of officials from the world's two largest
economies resumed talks in a bid to end their trade dispute.
    U.S. President Donald Trump on Tuesday also wrote on Twitter
that “Talks with China are going very well!”
    “I think the market’s reacting to the latest Trump tweet
about progress on the China negotiations,” said Subadra Rajappa,
head of U.S. rates strategy at Societe Generale in New York.
    Still, uncertainty over whether a deal with China will
actually be struck and concerns about the impact of an ongoing
partial government shutdown were seen as limiting risk appetite
in the short term.
    “Risk sentiment will improve, I think, once we get through
these two events over the next few weeks,” Rajappa said.
    Bond yields and U.S. stocks have gained since Federal
Reserve Chairman Jerome Powell on Friday sought to ease market
concerns that the U.S. central bank was ignoring signs of an
economic slowdown, saying he was aware of the risks and would be
patient and flexible in policy decisions this year.             
    That came after a strong jobs report for December where
employers added 312,000 workers to their payrolls, the most in
10 months, while average hourly earnings rose 11 cents, or 0.4
    Benchmark 10-year notes             fell 7/32 in price on
Tuesday to yield 2.705 percent, up from 2.682 percent on Monday.
The yields fell as low as 2.543 in overnight trading on Thursday
before the jobs report, which was the lowest since January 2018.
    The yields have tumbled from 3.05 percent at the beginning
of December as concerns about slowing international growth and
Fed rate increases prompted a sharp selloff in stocks.
    Market volatility has increased expectations that the U.S.
central bank will not raise rates again this year and interest
rate futures traders are even pricing for the possibility of a
rate cut, even though the Fed has signaled that two rate hikes
are likely.
    Investors will be looking for new clues on interest rate
policy when the Fed releases minutes from its December meeting
on Wednesday and in a speech on Thursday by Powell.
    The Treasury Department will sell $78 billion in
coupon-bearing supply this week, beginning with $38 billion in
three-year notes on Tuesday. The government will also sell $24
billion in 10-year notes on Wednesday and $16 billion in 30-year
bonds on Thursday.

 (Editing by Bernadette Baum)
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