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Bond Report

Nov. 5, 2019, 4:28 p.m. EST

10-year Treasury yield hits seven-week high amid hopes for U.S.-China trade deal

By Sunny Oh

Global bond yields rose Tuesday as hopes for a partial U.S.-China trade deal dampened demand for government paper in the U.S., Europe and Japan.

What are Treasurys doing?

The 10-year Treasury note yield (XTUP:BX:TMUBMUSD10Y)   surged 7.8 basis points to 1.865%, its highest since Sept. 13, while the two-year note rate (XTUP:BX:TMUBMUSD02Y)   was up 3.8 basis points to 1.633%. The 30-year bond yield (XTUP:BX:TMUBMUSD30Y)   climbed 7.4 basis points to 2.348%, marking its biggest one-day climb since Sept. 25.

What’s driving Treasurys?

The Wall Street Journal and other media said the White House was considering rolling back some existing tariffs on $111 billion of Chinese imports that had been imposed on Sept. 1 in order to finalize the so-called “phase one” deal. Originally, the deal was only expected to prevent the imposition of additional tariffs set to kick in at mid-December.

The positive trade developments also spurred selling in overseas bond markets. The 10-year Japanese government bond yield (XTUP:BX:TMBMKJP-10Y)   jumped 6.3 basis points to negative-0.117%. while the 10-year German government bond yield (XTUP:BX:TMBMKDE-10Y)   was up 3.9 basis points to negative-0.312%, according to Tradeweb data.

Stocks finished slightly higher Tuesday, with the Dow Jones Industrial Average (DOW:DJIA)   and Nasdaq Composite (NASDAQ:COMP)   posting record closes for their second straight day.

See : ‘A reflationary boom’ won’t be enough to send depressed bond yields higher, says JPMorgan

U.S. economic data also undermined safe-haven demand, with the Institute of Supply Management’s U.S. service sector activity index rising to 54.7% in October, up from 52.6% in September. Any reading above 50 indicates improving conditions.

An auction for $38 billion of U.S. Treasury three-year notes drew solid demand after the bond-market selloff helped push yields to more attractive levels for income-hungry investors. The Treasury Department said because the three-year notes sold at an interest rate and maturity matching an issue of a 10-year note, it would be considered a reopening of the 10-year note.

Investors also watched several speeches from senior Federal Reserve officials throughout the session. Richmond Fed President Thomas Barkin said a recession was not imminent.

What did market participants say?

“Trade progress via the U.S. and China being said to consider partial tariff rollbacks, coupled with most recent top-tier data prints coming in stronger than consensus, paints a textbook picture for higher rates and equities as near-term recessionary fears moderate,” said Jon Hill, an interest-rate strategist at BMO Capital Markets, in a research note.

Link to MarketWatch's Slice.