By Sunny Oh
U.S. Treasury yields extended their week-long slump on Friday as global bond markets rallied on the escalation of U.S. trade tensions following President Donald Trump’s vow to impose additional tariffs on China.
What are markets doing?
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.89% fell 2.9 basis points to 1.864%, its lowest since Nov. 7, 2016. The benchmark maturity slumped 21.7 basis points this week, its biggest such move since June 2012.
The 30-year bond rate /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +1.68% declined 3.4 basis points to 2.406%, its lowest since October 2016. The long-dated maturity fell 19.5 basis points this week, its biggest such move since July 2016. The 2-year note yield /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -21.12% fell a single basis point to 1.718%, its lowest since November 2017. It fell 15.2 basis points this week, the biggest such move since May.
In Europe, all maturities for German government bonds are now trading at negative yields. The 30-year German bond yield /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y -2.07% briefly fell into subzero territory for the first time on Friday.
What’s driving trading?
President Donald Trump announced on Twitter on Thursday that he would slap 10% import tariffs on $300 billion of Chinese imports that had yet to be subjected to levies, starting from Sept. 1.
China foreign ministry spokeswoman Hua Chunying said Trump’s pledge was tantamount to a “serious violation” and said Beijing would take “necessary countermeasures” if Trump followed through with his pledge.
The recent flare-up in global trade policy tensions comes after U.S.-China trade negotiations stalled in May. U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer met a Chinese delegation in Shanghai on Tuesday to renew talks, but they didn’t result in much progress.
Equity markets recorded losses worldwide in the wake of Trump’s announcement, driving investors into haven assets like U.S. government paper. The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.02% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.12% are on track for losses on Friday. China’s CSI 300 index finished lower by 1.5%, while Japan’s Topix index /zigman2/quotes/210598092/delayed JP:180460 -0.05% logged a 2.2% loss.
In economic data, monthly U.S. nonfarm payrolls report showed the U.S. economy created 164,000 new jobs in July. Analysts polled by MarketWatch forecast the a gain of 171,000 jobs in July, a drop from the 224,000 jobs added in June. The unemployment rate held at 3.7%, and average hourly earnings rose 0.3%.
In other data, the U.S. international trade deficit for June narrowed slightly to $55.2 billion, from $55.5 billion.
What did market participants’ say?
With the deterioration in international trade, markets have already started pricing in the prospect of more Federal Reserve interest rate cuts.
“The bias has to be towards cutting more aggressively, I think the 25 basis point move was a policy mistake. The yield curve flattened. That’s consistent with markets saying there’s not enough easing and policy remains too tight,” said Ed Al-Hussainy, senior interest rates and currencies analyst at Columbia Threadneedle, in an interview with MarketWatch.
The yield curve refers to the yield gap between short-dated bonds and their long-dated peers. A flatter curve, or a narrower spread, can indicate that interest rates are weighing on economic growth.
“Taking it all together, we would say that [the jobs report] is “fine” but nothing to get overly excited about. The report shows the same sort of themes we see across a number of other data releases, in that the trade war continues to have a bigger impact on manufacturing than the other sectors of the economy, and those other sectors continue to grow in spite of the trade war,” said Thomas Simons, senior money market economist at Jefferies.