Yields drop as US-China trade tension mounts

NEW YORK: US Treasury yields retreated on Tuesday as trade tensions between China and the United States intensified after President Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods while Beijing warned it would fight back.

US 10-year and 30-year yields fell to three-week lows, while those on two-year notes slid to two-week troughs.

Trump said his latest move was retaliation following China's decision to levy tariffs on $50 billion in US goods after Trump announced similar tariffs on Chinese goods on Friday.

"The markets are now paying more attention to signs of escalating trade tensions," said Lena Komileva, chief economist at G+ Economics in London, although she said the risk of a trade war would not necessarily change the more upbeat global macroeconomic near-term outlook.

"The global economy's pain threshold is much higher when demand is growing at peak capacity and corporate earnings growth is in double digits," Komileva said.

US benchmark 10-year yields fell to a three-week low of 2.853 percent, from Monday's 2.926 percent. They were last at 2.894 percent.

The low in US 10-year yields is approaching a key resistance level of 2.849 percent - the 61.8 percent retracement of June's sell-off, said Ian Lyngen, head of US rates strategy at BMO Capital in New York.

He believes there is further momentum in the latest surge in Treasury prices.

US 30-year yields dropped to 2.991 percent, a three-week low as well, compared with 3.055 percent on Monday, Thirty-year yields last traded at 3.028 percent.

On the short end of the curve, US two-year yields sank to a two-week low of 2.496 percent, compared with 2.558 percent late on Monday. Two-year yields last traded at 2.549 percent.

The yield curve, meanwhile, steepened for a third straight session on Tuesday, at least with respect to the spread between US 5-year notes and 30-year bonds. That spread widened to 26.90 basis points.

Gennadiy Goldberg, interest rates strategist at TD Securities in New York, said a steeper curve is expected in a trade war given that it could lead to stagflation, preventing the Federal Reserve from further raising interest rates.

Helping to balance out the threat of a trade war was better-than-expected data on US housing starts.

Housing starts rose 5.0 percent to a seasonally adjusted annual rate of 1.350 million units last month, the highest level since July 2007.

US yields came off their lows after the data.

Following the housing starts report, IHS Markit raised its forecast for US gross domestic product growth in the second quarter by one-tenth to 4.6 percent.