By Sunny Oh
U.S. Treasury yields fell on Friday after a China delegation cut their visit short to the U.S., underlining the potential for trade tensions to flare up again.
For the week, yields tumbled as the Federal Reserve cut rates and handled a surge in overnight borrowing rates.
What’s driving Treasurys?
The 10-year Treasury note yield (XTUP:BX:TMUBMUSD10Y) fell 2.3 basis points to 1.754%, extending a weeklong decline of 14.7 basis points. The 2-year note rate (XTUP:BX:TMUBMUSD02Y) fell 3.1 basis points to 1.711%, adding to a weeklong drop of 9 basis points. The 30-year bond yield (XTUP:BX:TMUBMUSD30Y) shed 1.7 basis points to 2.198%, adding to a weeklong drop of 17.6 basis points. All three maturities posted their biggest weekly drops in a month.
What are Treasurys doing?
The bond-market rallied in the afternoon after Reuters reported that a Chinese delegation had cancelled their trip to Montana and would return to China earlier than scheduled, according to the Montana Farm Bureau. Trade talks between the two countries were held in Washington on Friday, with President Donald Trump stating his desire for a comprehensive trade deal, beyond a promise to buy more U.S. farm goods, with the second largest economy in the world.
Investors turned their attention Friday also to speeches from senior Fed officials, after this week’s meeting of the Federal Open Market Committee highlighted the disagreement among its ranks on whether additional easing was warranted.
St. Louis Fed President James Bullard published a commentary explaining the reasons for his dissent at this week’s Fed meeting. Bullard wanted a half point cut because inflation continued to run well below the central bank’s 2% target, and an aggressive move to ease policy would “provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risk.”
Boston Fed President Eric Rosengren, who also dissented against the quarter point cut, said lowering interest rates could fan financial instability, exacerbating the next downturn.
The Fed conducted its fourth overnight repurchasing operation of the week on Friday. The U.S. central bank has started to regularly intervene into short-term funding markets to keep the fed funds rate within the Fed’s target range, currently between 1.75% to 2.00%.
The New York Fed outlined a schedule on Friday that would see it conduct daily repurchasing operations through October 10.
What did market participants’ say?
“This particular twist and turn shows that trade uncertainty is likely to continue. Even if this particular disagreement gets resolved, the administration could pivot to another one,” said Dave Leduc, chief investment officer of Mellon’s actively managed fixed income arm, in an interview.
“Still, economic growth forecasts continue to be positive, even though we expect the U.S. to slow next year,” he said.