Treasury yields erased their earlier decline on Wednesday after stocks rebounded in a volatile trading session that was partly attributed to China’s announcement that it would levy retaliatory tariffs on 106 categories of U.S. goods, underlining a ramping up of disruptive trade-war clashes.
However, as investors appeared to view the recent skirmish as tactical rather than reflective of concrete policies, demand for haven assets, like government paper, eased.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, +0.92% inched 0.4 basis point higher to 2.788%, after touching an intraday low of 2.748%, while the 30-year bond rate TMUBMUSD30Y, +0.77% rose 1.4 basis point to 3.029%, after scraping an intraday low of 2.989%. The 2-year note yield was mostly unchanged at 2.288%.
Bond prices move in the opposite direction of yields.
What’s driving Treasurys?
China announced retaliatory tariffs on U.S. goods, sparking fears that the White House and Beijing would escalate a trade conflicts into a full-blown trade war. Chinese officials said they would levy duties of up to 25% on 106 categories of U.S. products like airplanes and soybeans. This comes after President Donald Trump’s administration announced up to $50 billion of tariffs on China on Tuesday.
See: As the U.S.-China trade war starts to heat up, here’s the next step for investors
Read: Game of chicken: Trump adopts high-risk strategy in fight with China over unfair trade
In a repeat of Tuesday’s action, an initial spurt of haven-related buying of government bonds unwound after stocks swung back into positive territory. This constant tug of war between bonds and stocks have kept yields rangebound. Some analysts say the 10-year Treasury note yield would struggle to break above 3.0% if stocks continue their turbulent trading the rest of the year.
Treasurys have served as a safe harbor from which investors have sought shelter from the resurgence of market volatility. Although, higher tariffs, and higher import prices, should induce inflation, putting pressure on bonds, the lack of viable haven investments have overwhelmed those concerns, giving Treasurys a bid whenever stock values slipped.
Also check out: Here’s why bonds might not be a haven in a trade war
What did market participants say?
“Interest rates haven’t given up trying to follow stock price volatility, but they do have a better sense than stocks of the fundamental development and timeline of trade skirmishes,” said Jim Vogel, an interest-rate strategist for FTN Financial.
“Trade wars are not good for bonds, as any hit to growth is washed aside by the upward pressure they put on inflation,” said Douglas Porter, chief economist for BMO Capital Markets.
Read: 5 charts that show how China’s response to U.S. tariffs is rattling markets
What economic data is on investors’ radar?
- Payrolls-processing firm ADP estimated that the private sector created 241,000 jobs in March, a prelude to the Labor Department’s more widely-watched nonfarm payrolls report on Friday
- The Institute of Supply and Manufacturing reported its service index fell to 58.8%. Economists polled by MarketWatch are projecting it to fall to 59.0%, from 59.5% the previous month. A reading of at least 50 indicates expansion
- Factory orders for February came in at 1.2%, well below the expected reading of 1.7%
- Investors will also get a chance to peer at the minutes from March’s meeting by the Federal Open Market Committee, its rate-setting body
What other assets are on the move?
Stocks in Europe and Asia turned lower as trade jitters sapped appetite for risky assets. A trade war could also dampen global growth at a time when the European and Japanese economy are starting to find their feet.
The yield for the 10-year German government bond TMBMKDE-10Y, -0.12% was 0.5 basis point lower at 0.499%, after touching an intraday low of 0.479%, according to Tradeweb data. Investors treat German sovereign debt as a haven, given its strong domestic economy and its healthy government finances.