Bond Report: U.S. Treasury yields rising ahead of resumption of U.S.-China trade talks later this week

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Treasury yields rose Monday as traders awaited the resumption of U.S.-China trade talks set for later this week as each country grapples with the protracted trade dispute and signs that both nation’s economies are sputtering.

Government bond yields slumped last week after a raft of weaker-than-expected surveys of the manufacturing and services sector boosted hopes that the U.S. central bank would cut interest rates again in October.

Investors this week also are eyeing the Federal Reserve’s release on Wednesday of minutes from its Sept. 17-18 meeting, as well as looking for further cues about the potential path of rates from a host of coming events with Fed officials.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +1.73%, rose 2.8 basis points to 1.543%. The 2-year note yield, TMUBMUSD02Y, +4.87%, sensitive to expectations for interest-rate policy, was up 5.5 basis points to 1.455%. The 30-year bond yield TMUBMUSD30Y, +1.66%, rose 1.6 basis points to 2.033%.

Yields on bonds move in the opposite direction as price.

What’s driving the market?

The market is eager for signs of progress on the U.S.-China trade front, which has put downward pressure on the economies of the world’s two-largest trading partners.

U.S. stocks were slightly lower in trade even after White House Economic Advisor Larry Kudlow suggested the U.S. and China could be open to a short-term deal to avoid a deepening of the trade conflict.

Stocks started out lower in trading after Bloomberg News reported on Sunday said that the Chinese delegation would arrive for discussions in Washington with terms for a deal that won’t include “commitments on reforming Chinese industrial policy” or “government subsidies.”

Ahead of the trade talks, pressure on Trump has been mounting after a second whistleblower came forth to provide information about the U.S. president’s dealings with Ukraine, which are at the heart of an ongoing House impeachment inquiry into whether Trump used the Oval Office to investigate Democratic rival Joe Biden and his son Hunter and his office later tried to eliminate evidence relating to the matter.

Also, a federal judge in New York City on Monday ordered Trump to hand over eight years of corporate and personal tax returns to the Manhattan district attorney’s office, rejecting the argument that sitting U.S. presidents are immune from criminal prosecution.

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On the central bank front, Minneapolis Fed President Neel Kashkari said Monday that he was unsure how many more rate cuts are needed to support the economy. “My message is clear, we should be supporting the economy, not tapping the brakes,” Kashkari said during a question-and-answer session at a Native American finance officers conference in Prior Lake, Minn.

Friday’s job report meanwhile showed that the U.S. unemployment rate fell to a 50-year low of 3.5%, but that wages only bumped up only 2.9%, their weakest gain in more than a year, which could rattle consumers, a core driver of the American economy.

What are market participants saying?

All eyes will be on the coming Sino-American trade talks set for Thursday and Friday.

“The market is certainly paying a lot of attention on the trade front,” said Donald Ellenberger, head of multisector strategies group at Federated Investors Inc, in an interview. “But I would also have to say, it does feel like the market is getting a little bit desensitized to every headline and tweet on the trade front.”

Ellenberger said market participants will be keeping an eye on fresh economic data released this week and the coming U.S. Treasury debt auctions of 10-year and 30-year paper on Wednesday and Thursday.

“In general, there’s been a reasonable bid for that paper, but the street, as they always do, tries to cheapen up ahead of the auctions,” he said.

Hussein Sayed, chief market strategist at FXTM said there was “no doubt that concerns over the outlook of global economic growth have severely intensified over the past couple of months due to the U.S.-China trade dispute,” in a note.

“President Trump may be willing to accept an amended deal to avoid a further selloff on Wall Street, especially with the ongoing impeachment inquiry. However, it remains unclear whether the Chinese will provide concessions on industrial policies or government subsidies, which have been a critical demand for the U.S. administration,” he said.