July 9, 2019 / 2:49 PM / 3 months ago

TREASURIES-Yields rise on trade hopes; curve modestly steeper

NEW YORK, July 9 (Reuters) - U.S. Treasury yields climbed on Tuesday morning amid reported progress in Washington’s trade talks with both Beijing and Brussels.

Yields at the long end of the curve moved more than those at the short end, tempering a curve flattening trend as the market awaited Federal Reserve Chair Jerome Powell’s congressional testimony on Wednesday which will be mined for insight into the expected interest rate cut in July.

The benchmark 30-year Treasury bond yield was last up 2.6 basis points to 2.546%, approaching levels hit Friday following the report of stronger-than-expected employment growth in June. The 10-year yield was up 2.7 basis points to 2.061%, while at the short end, the two-year yield was up 1 basis point.

The United States and China are set to relaunch trade talks this week after a two-month hiatus, which helped bolster yields. White House economic adviser Larry Kudlow on Tuesday said China was expected to move forward with agriculture purchases from the United States even as trade talks continued between the two countries.

Kudlow also said that talks with the European Union to move forward on a trade agreement were in progress.

Treasuries serve as a safe-haven investment in moments of political and economic volatility, so indications of progress in trade negotiations led investors into riskier assets.

The spread between two- and 10-year yields, the most commonly used measure of the yield curve, fell in early trade to 14.2 basis points, its lowest since May 31. Helped by trade optimism, however, the spread has moved higher in mid-morning trade, last at 16.9 basis points. It nevertheless remained well below the levels hit last month.

The “expectation that we would get a weaker than expected payrolls number (has) thrown traders off their game, at least for now. Today and the rest of this week we will give heavy weight to what the Fed says,” said Kevin Giddis, head of fixed income capital markets at Raymond James.

A sharp rebound in U.S. job growth in June cut expectations that the Fed will cut interest rates by 50 basis points when it meets at the end of July. Powell will deliver the Fed’s semiannual monetary policy report to the House of Representatives Financial Services Committee on Wednesday, followed by testimony before the Senate Banking Committee on Thursday.

“With a 50 basis point cut pretty much off the table, the market clings to a 25 basis point cut, but the Fed holds the cards, and for now, gets to play them as they wish,” said Giddis. (Reporting by Kate Duguid; Editing by Bernadette Baum)

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