Treasury yields climb after plans for China and U.S. to renew trade talks

U.S. Treasurys slumped on Thursday, pushing yields higher, as demand for haven assets, and thus flows into U.S. government paper, abated after reports saying China and the U.S. would resume trade talks.

The 10-year Treasury note yield TMUBMUSD10Y, +0.41% advanced 4 basis points to 2.891%. The 2-year note yield TMUBMUSD02Y, +0.00% gained 2.9 basis points to 2.633%, while the 30-year bond rate TMUBMUSD30Y, +0.03% rose 2.8 basis points to 3.052%. Bond prices move in the opposite direction of yields.

Hopes that Washington and Beijing may resolve their trade spat surged Thursday after reports said China would send a delegation to the U.S. later in August for further trade talks. Vice Commerce Minister Wang Shouwen will meet David Malpass, the U.S. Treasury Department’s undersecretary for international affairs, according to a statement from China’s Commerce Ministry. This would be the first such meeting between the two sides since July.

Following the reports, Treasury prices fell and equities rose as investors rotated from bonds in to stocks, suggesting investors’ appetite for risky assets were returning, however briefly. The S&P 500 SPX, +0.80% was up by about 1%, while the blue-chip Dow Jones Industrial Average DJIA, +1.61% advanced more than 400 points at its intraday peak.

“There seems to have been a bit of a rebound in risk overnight and today,” said Gennadiy Goldberg, rates strategist at TD Securities.

A Bank of America Merrill Lynch survey of fund managers in August showed a trade war was ranked the top tail risk among investors. A tail risk refers to a low probability event, but one that could deliver a hefty hit to the market’s returns.

Investors also continue to keep their eye on Turkey’s currency crisis that had sparked fears of contagion among emerging markets and European banks. On Wednesday, Qatar said it would invest $15 billion in Turkey to prop up the economy, according to reports. The Turkish lira USDTRY, -2.9548% is on track for its third straight gain against the dollar, suggesting the devastated currency may have escaped the worst of the selloff.

In a conference call, the Turkish finance minister Berat Albayrak ruled out plans to institute capital controls, placating investors who feared they would not be able to take money out of the country. Albayrak also said the government would push for tighter fiscal policy and support the banking sector.

“He did a decent job in saying the right things, but the conflicts that everyone is concerned about remains. [News reports] picking up on no capital controls, which is what many people thought were the next steps. For the moment, ti seems the market is buying it, but I don’t think the waters are calm yet, just too many things swirling around,” said Marvin Loh, senior fixed-income strategist at BNY Mellon.

On the data front, housing starts for July rose by less than 1%. Weekly jobless claims for the seven-day period ending in August 11 came in at 212,000, while the Philadelphia Fed manufacturing index slipped to 11.9 in August from 25.7 in July, the lowest reading in 21 months.

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