US bond market rallies on Trump's tariff threat

NEW YORK: The US Treasury market rallied on Thursday with 10-year yields tumbling to their lowest levels since November 2016, as US President Donald Trump's threat to slap more duties on Chinese goods touched off a stampede for safe-haven government bonds.

Most Treasury yields recorded their steepest one-day drop since May 29, 2018 when investors flocked into Treasuries stemming from a political crisis in Italy. Treasury prices ripped higher, coming off a lackluster July when they recorded a 0.118% loss.

Trump's latest move to pressure Beijing for a trade deal intensified appetite for Treasuries, which was already underpinned by worries about a global economy that is wobbling due to the US-China trade conflict.

The Institute for Supply Management said earlier Thursday its index of national factory activity fell to 51.2 last month, the lowest reading since August 2016.

"Trump's threat of more tariffs is going to be a continued negative factor for the global economy. Treasuries should be able to maintain this support," said John Canavan, lead analyst at Oxford Economics in New York.

A chaotic day in financial markets may also set the stage the Federal Reserve to enter into a protracted easing cycle rather than a "a mid-cycle adjustment to policy" that Fed Chairman Jerome Powell characterized on Wednesday after policy-makers lowered interest rates for the first time since 2008.

The futures market implied traders see a 73% chance the Fed would lower rates again at its Sept. 17-18 policy meeting, up from 51% late on Wednesday, according to CME Group's FedWatch program.

It is unclear whether even a robust payrolls report for July due at 8:30 a.m. (1230 GMT) on Friday would cool the blistering demand for Treasuries, analysts said.

Record low yields in the euro zone, where roughly $13 trillion worth of government debt are trading with negative yields, will keep downward pressure on US yields, analysts said.

In late US trading, yields on benchmark 10-year Treasury notes were 12.60 basis points lower at 1.895% which was their steepest single-day drop since May 29, 2018.

Ten-year yields touched 1.876% at one point after Trump's tweet on tariffs, marking their lowest level since Nov. 9, 2016 - the day after Trump's surprise presidential win.

The 30-year bond surged 2 points in price for a yield of 2.438%, down 8.80 basis points on the day. Thirty-year yields hit 2.422%, the lowest since October 2016.