Bond Report: Treasury yields climb on signs of progress towards U.S.-China trade deal

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U.S. Treasury yields rose on Friday amid signs that the U.S. was nearing a limited trade deal that could prevent a further escalation of the tariff spat between the two world’s largest economies.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +2.13%   was up by 2.1 basis points to 1.677%. The 2-year note rate TMUBMUSD02Y, +2.92%   rose 3.1 basis points to 1.561%, while the 30-year bond yield TMUBMUSD30Y, +1.38%   edged higher by 1.4 basis points to 2.166%.

What’s driving Treasurys?

Hopes that some progress would be reached towards easing U.S.-China trade tensions comes as the Chinese delegation to Washington wraps up its two-day visit. President Donald Trump said the first day of negotiations had gone “really well.” He said he would plan to meet Chinese Vice Premier Liu He on Friday.

Analysts say both sides could strike a less expansive trade deal that would halt the imposition of tariffs on Chinese imports next week.

U.S. and British bond-markets came under pressure after U.K. Prime Minister Boris Johnson held talks with Ireland’s head of state Leo Varadkar, who said the meeting had been “very promising.” Talks have been held back by lingering questions over how a border between Ireland and Northern Ireland will be implemented when the U.K. leaves the EU.

The 10-year yield for U.K. government bonds TMBMKGB-10Y, +14.07%  , or gilts, surged 9.2 basis points to 0.638%.

In economic data, investors will see a report on U.S. import and export prices for September due at 8:30 a.m. Eastern Time, and a reading on U.S. consumer sentiment due at 10 a.m.

Investors also will watch for comments from Boston Federal Reserve President Eric Rosengren — one of three dissenters in the Fed’s last decision — set to speak at 1:15 p.m., while Dallas Fed President Robert Kaplan is expected to moderate a panel in San Francisco at 3 p.m.

What did market participants’ say?

“Fixed income markets were already under pressure before the news about the Trump-China meeting broke and before the Johnson-Varadkar statement was published,” wrote Peter Schaffrik, global macro analyst at RBC Capital Markets.

“We assume that the market is still slightly biased to the long side and with the risks of going into a weekend where there could be genuine progress between [U.S.-China trade and Brexit negotiations], running bond longs seems a daunting proposal,” wrote Schaffrik.

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