Trade-war fears, Fed send 10-year Treasury yield lower
U.S. government bonds found support Friday, extending a yield decline for Treasurys as an escalating trade spat between the U.S. and China contributed to a move to the perceived safety of government paper.
Short-dated yields, on the other hand, were elevated for the week after the Federal Reserve signaled its intentions to raise rates four times this year.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, -0.56% fell 2.2 basis points to 2.926%, trimming its weeklong decline to 1.1 basis points. While, the 30-year bond yield TMUBMUSD30Y, -0.42% shed 2.1 basis points to 3.048%, adding to a weeklong decline of 3.3 basis points.
The two-year note yield TMUBMUSD02Y, +0.17% sensitive to Fed policy, fell 1.6 basis points to 2.557%, paring its weeklong climb to 6.2 basis points. Bond prices move in the opposite direction of yields.
Meanwhile, a measure of the yield curve, the differential between two-year and 10-year Treasurys, stood at 36.9 basis points, or 0.369 percentage point, holding at the tightest spread since 2007.
The yield curve, which reflects the rate gap across all Treasury maturities and tends to slope higher because investors generally demand richer yields for lending for a longer period, has been an accurate predictor of recessions.
What’s driving the bond market?
Worries about an escalation of tariff-driven tensions comes as bond investors have digested a barrage of central-bank actions, capped by a the Bank of Japan’s decision on Friday to hold its rates steady, as expected, amid signs of recalcitrant inflation, failing to move near the central bank’s 2% target. The simmering trade fears pushed risky assets like stocks lower and drew investors into long-dated government paper, flattening the yield curve.
President Donald Trump on Friday announced tariffs on $50 billion in Chinese goods. Beijing responded to Trump’s list approval by saying it will impose levies of its own on $50 billion of U.S. goods.
See: Stock-market investors see China tariffs as a ‘buzzkill’ and are acting as if a genuine trade war just erupted
Read: Escalating U.S.-China trade spat comes at a bad time for global growth, economist says
On Thursday, the European Central Bank laid out the end of its easy-money efforts, though it offered a longer runway for an eventual rate hike than the market had anticipated. The Federal Reserve on Wednesday lifted the federal-funds rate a quarter-point to a range between 1.75% to 2%, marking the second rate hike of 2018 and the seventh since U.S. policy makers started to normalize rates in December 2015.
Short-dated yields rose this week as the central bank and Fed Chairman Jerome Powell signaled the willingness to hike rates four times this year, citing the strong outlook for growth and inflation. New York Fed President William Dudley said Friday he foresaw the need for rate hikes to slow the economy as unemployment fell below the long-term natural rate, according to reports. Dudley will retire on Sunday, with current San Francisco Fed President John Williams set to take his place on Monday.
Also check out: 5 key takeaways from the ECB’s decision to wind down its massive bond-buying program
What are strategists saying?
“The FOMC raised rates as expected, and formalized a projection for two more rate hikes in 2018. With both dual mandate objectives met, policy makers view fiscal stimulus as creating a window of opportunity to normalize rates and the balance sheet without creating downside risk to the economy. The ECB also signaled that it is following in the Fed’s normalization footsteps by announcing an end to QE in December of this year,” said Ward McCarthy, chief financial economist for Jefferies, in a note.
What else is on investors’ radar?
The Empire State Index, an economic snapshot of New York state, rose to 25.0 in June from 20.1 the previous month. The University of Michigan’s consumer sentiment index rose to 99.3 in June, above the 98.5 reading expected by economists polled by MarketWatch.
Meanwhile, industrial production fell 0.1% in May, the first dip in four months. Economists say the weakness in manufacturing sector was a one-off linked to a fire at an auto-parts supplier for Ford trucks.
Mark DeCambre is MarketWatch's markets editor. He is based in New York. Follow him on Twitter @mdecambre.
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