Yields rise as US-China trade tension eases

NEW YORK: US Treasury yields drifted higher on most maturities except for 30-year bonds, as equities rallied amid positive developments in trade negotiations between the United States and China.

Treasury debt prices also sold off ahead of a $38 billion auction of US 3-year notes. Investors generally sell Treasuries ahead of an auction to push the yield higher so they can buy them at a lower price.

But positive trade headlines have eased some of the global jitters, analysts said.

"Treasuries were better bid in Tokyo but came under pressure in London. Positive US-China trade news has something to do with it," said Justin Lederer, Treasury analyst, at Canto Fitzgerald in New York.

China and the United States discussed a road map for the next stage of their trade talks on Tuesday during a telephone call between Vice Premier Liu He, US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer.

A US Treasury spokesman confirmed the call with Liu took place, but offered no further details.

"The limited information makes it difficult for investors to skew whether or not the event should be interpreted as progress, however the initial risk-on sentiment speaks to the notion that any interaction between two trade partners brings a deal at least incrementally closer," BMO Capital Markets said in a research note.

In midmorning trading, US 10-year note yields edged up to 2.862 percent from 2.856 percent late on Monday.

US 30-year bond yields, however, fell to 3.112 percent from 3.129 percent on Monday.

As a result, the 5-year and 30-year yield curve continued flattening on Tuesday, after two sessions of steepening last week. The flatter yield curve reflects persistent unease about geopolitical risks, analysts said.

On the short end of the curve, US 2-year yields inched up to 2.745 percent, compared with Monday's 2.727 percent .

US data showing an unexpected rise in producer prices last month nudged yields higher.

The Labor Department said its producer price index for final demand edged up 0.1 percent last month after jumping 0.6 percent in October. Economists polled by Reuters had forecast PPI to be unchanged in November and rise 2.5 percent on a year-on-year basis.

Investors are now looking to the US 3-year note auction later in the session.

Analysts at Action Economics said the note has cheapened a bit in price and is somewhat appealing to investors. The 3-year note has also flattened against longer-dated debt, which, the research firm said, could support its buying at the margin.