Treasury yields bounce as fresh round of U.S.-China trade talks begin

Treasury yields rose Monday, following last week’s volatile trading, as investors watched for progress in renewed trade talks between U.S. and Chinese officials.

The 10-year Treasury note yield TMUBMUSD10Y, +0.00%  rose 2.3 basis points to 2.684%, from an intraday low of 2.634%. The 2-year note yield TMUBMUSD02Y, +0.16% advanced 3.6 basis points to 2.524%, while the 30-year bond yield TMUBMUSD30Y, -0.01% was mostly unchanged at 2.977%. Bond prices move inversely to yields.

Hopes for trade tensions to ease come as U.S. and China conduct talks to end their longstanding trade dispute on Monday and Tuesday. Bloomberg reported that high-ranking Chinese Vice Premier Liu He unexpectedly made an appearance in the negotiations, giving a boost to what was initially scheduled as a meeting between midlevel officials. The S&P 500 SPX, +0.70%  and DJIA, +0.42%  were both up on Monday, dampening demand for haven assets like government paper.

“Both sides have compelling reasons to act — China quite clearly is suffering from an economic slowdown, and [U.S. President] Donald Trump obviously fears that a nervous stock market could imperil his re-election,” said Greg Valliere, chief global strategist for Horizon Investments, in a note.

Trump has expressed optimism over negotiations, arguing that tariffs on China had brought it to the bargaining table. But both Beijing and Washington have refused to budge from their original stances since Trump last met Chinese President Xi Jinping in early December.

If a deal isn’t reached, tariffs on $200 billion of Chinese imports are set to increase to 25% from 10% in early March. That would mark a serious escalation and add to the global economic headwinds facing both sides amid doubts over the durability of global growth.

The U.S. government shutdown continued as Trump maintained his demands for funding of a border wall. He has floated the possibility of calling a national emergency to circumvent Congress and secure finances for the wall.

Monday’s yield rise appeared to accelerate after the Institute for Supply Management’s services sector gauge for December fell to 57.6%, a five-month low, from 60.7% the previous month. Still, it’s relative strength against the recent reading from the ISM’s manufacturing gauge, suggests the U.S. services firms remains in better than health than their industrial peers. Any number above 50% indicates growth in activity.

“The key takeaway from today’s report is that there is no reason to panic about an excessively rapid cooling of the U.S. economy. While policy headwinds and tighter financial conditions will slow the pace of growth in 2019, there is a lot of gray area between a 3% growth economy and an outright recession,” wrote Jake McRobie, an analyst at Oxford Economics.

Atlanta Fed President Raphael Bostic said he expected only one rate increase in 2019. This week will see plenty of speeches from senior Fed officials as Fed Chairman Jerome Powell is set to speak again Thursday, after he said the central bank would take a more flexible approach to raising rates last Friday.

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