2-year Treasury yield stages biggest one-day jump since February 2015

Treasury yields rose on Thursday after the U.S. and China agreed to meet in early October to renew trade talks, easing investors’ appetite for haven assets like government paper.

Improving data on the jobs market and the services sector also helped market participants shake off fears that trade uncertainty would lead the U.S. to an imminent recession.

What are Treasurys doing?

The 2-year note rate TMUBMUSD02Y, +0.80% surged 10.8 basis points to 1.544%, marking its biggest daily increase since February 2015.

The 10-year Treasury note yield TMUBMUSD10Y, +0.66% climbed 11.3 basis points to 1.569%, marking its biggest one-day rise since November 2016. The 30-year bond yieldTMUBMUSD30Y, +0.99% rose 10.8 basis points to 2.060%, its biggest daily rise since October 2018. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

The Chinese Commerce Ministry said that Vice Premier Liu He had talked to Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer over the phone. Both sides agreed to meet in early October in Washington to restart trade talks that had stalled since May.

Investors hope that a clear timetable toward further negotiations could prevent the implementation of additional tariffs. Beijing and Washington have fired tit-for-tat retaliatory levies on each other in August, raising concerns that trade uncertainty will last well into next year.

The constructive trade developments helped to spur inflows into risk assets as investors sold bonds. The S&P 500 SPX, +1.30% and the Dow Jones Industrial Average DJIA, +1.41%were up more than 1% on Thursday, putting the key stock-market benchmarks on course for weekly gains.

In economic data, Automatic Data Processing Inc. reported private sector employers had added 195,000 jobs in August, up from 142,000 in the previous month. This comes ahead of the more widely monitored nonfarm employment numbers on Friday.

The resilience of the U.S. economy was also underlined by the Institute for Supply Management’s nonmanufacturing activity gauge. The services index jumped to 56.4% in August, up from 53.7% in July. Economists polled by MarketWatch had forecast a reading of 54.2%. Any number above 50% indicates an expansion in activity.

The strong data undercut expectations for the Federal Reserve to go on a full-blown easing cycle. Traders on the fed fund futures market estimated the chance of the U.S. central bank to stand pat at its September meeting rose to 4% from nothing a day ago.

What did market participants’ say?

“The Treasury market is trading lower … as several factors have led investors back to risk, at least for the time being. Front and center to this is the fact that while the U.S. and China have agreed to meet, it won’t be until October, and there are a bunch of trading days between now and then. The other significant factor is that the U.S. economy continues to show strength, which is driving the ‘recessionists’ crazy,” wrote Kevin Giddis, head of fixed income at Raymond James.

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