Yields fall, curve flattens as trade deal boost fades

NEW YORK: Benchmark US Treasury yields fell back below 3 percent on Monday, the yield flattened and the curve between three-year and five-year notes inverted for the first time since 2007, as risk appetite sparked by a US, China trade agreement faded.

Yields rose earlier after a deal between the US and China to hold off on new tariffs boosted stocks and reduced demand for safe haven US debt.

Stocks pared gains and Treasury yields fell, however, as investors focused on continuing trade tensions between the countries.

"Some of the exuberance is fading off a little bit as people digest the news and understand that we're still a ways away from having any real deal in place," said Zach Griffiths, an interest rate strategist at Wells Fargo in Charlotte, North Carolina.

Benchmark 10-year notes gained 7/32 in price to yield 2.988 percent, after getting as low as 2.986 percent, the lowest since Sept. 18.

The yield curve between two-year and 10-year notes flattened to 16 basis points, the flattest in over a decade.

The curve between three-year and five-year notes inverted to a low of negative 0.70 basis points for the first time since 2007. It is the first part of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.

The highly watched two-year, 10-year part of the yield curve is likely to follow suit, though an inversion between two-year and five-year notes may occur first, said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

The two-year, 10-year yield curve is a key focus for investors as an inversion is seen as predictor of a US recession.

The yield curve has flattened as continuing interest rate hikes send short-dated yields higher, while longer-dated Treasuries are supported by tepid inflation and slowing global growth.

The Federal Reserve is widely expected to raise rates at its meeting on Dec. 18-19. However, interest rate futures traders are now pricing in only one rate increase during 2019, below Fed projections of three, according to the CME Group's FedWatch Tool.

Fed Chairman Jerome Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee, but the hearing was postponed because of a national day of mourning for US President George H.W. Bush, who died on Friday.

No new date for the rescheduled testimony has been announced.