Bond Report: Treasury yields fall as investors remain unsettled by lack of trade progress

U.S. Treasury yields edged lower on Monday as investors kept a close watch on progress toward a phase-one trade agreement between Washington and Beijing, which has kept bond traders on tenterhooks.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -1.85%  fell 2.3 basis points to 1.785%, its lowest since Nov. 1, while the two-year note rate TMUBMUSD02Y, -0.76%  was virtually unchanged at 1.596%. The 30-year bond yield TMUBMUSD30Y, -2.06%  slipped 4.1 basis points to 2.254%, its lowest since Nov. 1.

What’s driving Treasurys?

Investors continued to be unsettled by the uncertain prospect of a trade deal. A report by CNBC on Monday suggested that without rolling back existing tariffs the outlook for a resolution looks dim. But helping to offset the trade pessimism, the Trump administration issued a 90-day extension of a license allowing U.S. companies to keep doing business with Chinese telecom giant Huawei Technologies Co.

A report by Bloomberg News on Tuesday said both Washington and Beijing were using the near-agreement that broke down in May as the benchmark to decide on the level of tariff rollbacks, citing people familiar with talks.

See: The biggest risk facing the stock market in the coming year isn’t trade jitters or the election, Deutsche Bank warns

Recent economic data showed how the drop in bond yields this year may be spurring increased economic activity in rate-sensitive sectors. Housing starts climbed 3.8% in October to an annual growth rate of 1.314 million, with economists polled by MarketWatch having expected it to run at a pace of 1.325 million. In addition, building permits jumped 5% in October to a 1.461 million annual rate.

A senior official from the Federal Reserve emphasized how the central bank’s policy was “appropriate” but, at the same time, “not locked in.” New York Fed President John Williams said on Tuesday that the economy was in a good place, but the three interest-rate cuts so far should help support growth.

The Treasury International Capital report released on Monday showed that holdings of U.S. government paper by Japan and China, the two largest foreign investors of Treasurys, had fallen in September.

What did market participants say?

“Backed by a wall of central banking support on both sides of the Atlantic, investors are taking the relief provided by the president’s Huawei olive branch as positive in terms of equities while the ongoing trade spat remains more than justification for a continued bid for safe haven government bonds, notably Treasurys” and German government bonds, wrote analysts at Rabobank.

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