Treasury yields rise as trade worries cool ahead of holiday break

Treasury prices on Tuesday slipped, nudging yields higher, for a second day in a row as trade-war fears moderated in a holiday-abbreviated week.

The bond market is slated to close early at 2 p. m. Eastern Time and remain shuttered in observance of the Fourth of July holiday on Wednesday.

The yield on the benchmark 10-year Treasury note advanced 1.5 basis point to 2.882%, while the 2-year yield  was virtually unchanged at 2.553%. The yield on the 30-year Treasury bond edged 0.7 basis point higher to 2.998%.

Yields rise as bond prices fall.

Although trade uncertainty has been a major contributor to sentiment, with President Donald Trump’s administration set to enact tariffs on up to $50 billion on Chinese products scheduled to take effect Friday, investors have trained their attention to stronger-than-expected data and anticipation of higher yields ahead.

On Monday, the Institute for Supply Management said its manufacturing index rose to 60.2% last month from 58.7% in May. That matches the second-highest level of the current economic expansion that began in mid-2009. A reading of at least 50 signifies improving conditions.

Upbeat data are likely to compel the Federal Reserve to lift interest rates twice more in 2018, which can weigh on the appetite for Treasurys already in circulation in favor of higher future yields. The Fed has been aiming to normalize monetary policy in an effort to return it to levels seen before the 2007-09 financial crisis forced central banks across the globe to put in place a raft of measures to ease market distress.

In recent weeks, tensions around trade, however, have kept rates lower because investors have turned to the perceived safety of U.S. government bonds amid the tit-for-tat tariff spat between Washington and trading partners in China, North America and Europe. Demand for these markets has driven up prices, helping to put a lid on yields.

Meanwhile, anxieties centered on European politics eased after German Chancellor Angela Merkel’s fragile coalition government averted a threat centered on immigration policy that threatened to spark a new election for leadership in the European Union’s largest economy.

Meanwhile, U.S. stock benchmarks, notably the Dow Jones Industrial Average and the S&P 500 index looked poised to open higher, signaling that appetite for equities, which tend to draw investors away from bonds, is strong. U.S. stock indexes will close at 1 p.m., an hour before the bond market.

Looking ahead, investors await a reading on factory orders for May due at 10 a.m., with a round of monthly auto sales figures from June slated throughout the session. Auto sales may offer some clues about the impact of the threat of levies on import being bandied about by the U.S. and others.

Further down the road, bond investors will face a packed stretch of data that will include minutes from the Fed’s most recent meeting on Thursday and reports on employment, culminating in Friday’s key nonfarm-payrolls report for June.

“We do have a lot of data over the next couple of work days that could push [yields] higher,” said Tom di Galoma, managing director rates at Seaport Global. He added the long-bond yield hit a key level at around 2.97%, representing its 200-day moving average and he doesn’t expect the rate to fall much lower than that. Investors tend to follow moving averages to determine bullish and bearish momentum in an asset.