Yields dip as Trump threatens more tariffs on China

NEW YORK: Treasury yields fell almost a basis point on Tuesday morning as investors bought the longer end of the curve on resurgent worries about U.S.-China trade tensions after President Donald Trump said he expected to increase tariffs on Chinese goods.

Ahead of a meeting with Chinese President Xi Jinping at the G-20 summit in Argentina this weekend, Trump said it was "highly unlikely" he would accept China's request to hold off on raising tariffs on $200 billion of Chinese imports. The remarks came in an interview with the Wall Street Journal in which Trump also repeated his threat to place tariffs on all remaining imports from China.

"Amid the data and all the Fed talk this week (U.S.-China trade) is still the main focus. It has the biggest possible impact on risk sentiment which largely has been the day-to-day driver across asset classes," said Jonathan Cohn, interest rate strategist at Credit Suisse in New York.

U.S. government debt is seen as a safe-haven investment in times of political uncertainty. But buying was tempered when Federal Reserve Vice Chair Richard Clarida backed further rate hikes in a carefully worded speech.

Clarida also said the Fed should be even more attentive to new economic data as it moves closer to a neutral stance.

Yields were trading "on the back of less dovish comments from Clarida. We did see a bit of a sell-off," said Cohn, "which I would expect to continue through Powell's speech tomorrow, who I think will lean on the hawkish side."

The Treasury Department will auction off $40 billion in five-year notes at 1 p.m. ET (1800 GMT). The offering is $1 billion more than the prior month's, and is the biggest since May 2010. This will be the second auction this week, which will see a total of $129 billion in new notes sold.

Bond issuance has risen steadily this year to pay for President Donald Trump's tax cuts and spending increases. Although market participants have worried that the increased supply will diminish demand, some of that fear may have been waylaid on Monday, when Treasury sold $39 billion of new two-year notes to strong demand from direct bidders.

The benchmark 10-year government yield was down a basis point from Monday's close, last at 3.06 percent. The two-year note yield was down 0.3 basis point to 2.83 percent. The 30-year yield was down 0.7 basis point to 3.31 percent.