By Sunny Oh
Treasury prices rallied Wednesday, pushing yields lower, after fears of a further escalation in trade tensions drew selling in global equities, stoking demand for haven assets.
Expectations for rate cuts and economic concerns have also deepened an inversion along a key measure of the yield curve — often a prelude to a recession.
What are Treasurys doing?
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +3.55% slipped 3 basis points to 2.238%, its lowest since Sep. 26. The 2-year note yield /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -4.73% fell 5 basis points to 2.079%, its lowest since Feb. 2018, while the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +2.23% slipped 3.4 basis points to 2.673%, its lowest since Nov. 2016. Debt prices move in the opposite direction of yields.
The spread between the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +3.55% and the 3-month Treasury bill /zigman2/quotes/211347046/realtime BX:TMUBMUSD03M +0.35% deepened its slide into inversion, dropping to a negative 11 basis points, its most severe since 2007. Inversions of that measure of the yield curve are viewed as a reliable recession indicator.
What’s driving Treasurys?
Investors piled into government paper after reports said Beijing could curb its exports of rare earths to the U.S. as a retaliatory measure against Washington. A Chinese official from the National Development and Reform Commission said “if anyone wants to use imported rare earths against China, the Chinese people won’t agree,” according to Xinhua.
Rare earths are integral to supply chains for consumer electronics, computer chips, and batteries, and could disrupt the business of U.S. tech companies. Speculation around such a move has underlined the deteriorating trade ties between the U.S. and China, increasing the risk of a protracted tussle between Beijing and Washington.
The S&P 500 /zigman2/quotes/210599714/realtime SPX +1.34% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.13% fell sharply on Wednesday. The Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP +1.92% fell 1.4%, while Japan’s Topix /zigman2/quotes/210598092/delayed JP:180460 +1.56% finished lower by 0.9%.
The sharp slide in yields, pushing bond prices to more expensive levels, may have weighed on appetite for some maturities. An auction for $32 billion of 7-year notes “tailed” 1.8 basis points, a sign of a tepid sale. The tail is the gap between the highest yield the Treasury sold in the auction and the highest yield expected when the auction began - the “when issued” level.
What did market participants say?
“The wild card remains the state of US/China trade talks. The base case has been that the two sides would reach a superficial agreement that allowed each to claim victory. With markets coming under pressure, our expectation would be that the Trump administration would be more inclined to strike a deal, but this has become almost impossible to predict,” wrote Tom Garretson, a portfolio strategist at RBC Wealth Management.