Bond Report: 10-year Treasury yield plumbs two-week low after Beijing questions long-term trade breakthrough

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U.S. Treasury yields fell sharply on Thursday after a report that Chinese government officials were unsure if a longer-term comprehensive trade deal with the U.S. can be reached, only one day after Federal Reserve chairman Jerome Powell suggested no further immediate interest rate cuts may be needed given geopolitical risks had eased.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -4.04% tumbled 8.9 basis points to a two-week low of 1.707%, while the 2-year note rate TMUBMUSD02Y, -3.48% fell 8.8 basis points to 1.542%. The 30-year bond yield TMUBMUSD30Y, -3.24% slipped 8.4 basis points to 2.188%.

What’s driving Treasurys?

Investors sought shelter in haven assets after Chinese officials questioned the likelihood of a long-term comprehensive deal that would address sticking points such as Chinese industrial policy, according to Bloomberg. However, Reuters also reported that Beijing could remove additional tariffs on U.S. farm products to make it easier for Chinese importers to buy soybeans.

U.S. President Donald Trump and China’s president Xi Jinping were expected to sign an interim trade deal at the APEC meeting in Chile next month, but on Wednesday Chile canceled the meeting due to continued unrest in that country. China’s Commerce Ministry said both U.S. and Chinese trade delegations will hold a phone call on Friday.

The S&P 500 SPX, -0.59% stock index was trading lower on Thursday, after the large-cap benchmark closed at a record on Wednesday.

The fall in yields came after the Federal Reserve cut interest rates for the third time this week on Wednesday, while Fed chair Jerome Powell noted that international trade tensions had eased along with the chances of a no-deal Brexit, meaning the Fed may not need to lower interest rates again unless a “material” deterioration of economic outlook took place.

See: Fed cuts rates for third meeting in a row, signals pause

U.S. economic data on Thursday also cast doubt on the strength of the economy, with the Chicago purchasing managers index, a gauge of Midwest manufacturing activity, falling to 43.2 in October from 47.1 in September. The number of Americans newly applying for jobless benefits ticked up by 5,000 to 218,000 in the week ended Oct. 26, though remained near historic lows.

Weekly jobless claims ran at 218,000 in the seven days ending in Oct. 26. Meanwhile, the employment cost index in the third-quarter rose 0.7%.

What did market participants’ say?

“The rally in long-term bonds has more to do with the China news that we might never get a big trade deal, which put a damper on the Fed’s messaging yesterday,” said Lindsay Bernum, global macro analyst for Smith Capital Investors, in an interview with MarketWatch. “The market is saying that we’re not out of the woods yet.”