Yields rise as trade deal optimism boosts risk sentiment

NEW YORK: US Treasury yields rose for a third day, in line with higher US stock futures, as optimism over a trade deal between the United States and China boosted risk appetite, while the Treasury Department also prepared to sell new supply.

US Commerce Secretary Wilbur Ross predicted on Monday that Beijing and Washington could reach a trade deal that "we can live with" as dozens of officials from the world's two largest economies resumed talks in a bid to end their trade dispute.

US President Donald Trump on Tuesday also wrote on Twitter that "Talks with China are going very well!"

"I think the market's reacting to the latest Trump tweet about progress on the China negotiations," said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.

Still, uncertainty over whether a deal with China will actually be struck and concerns about the impact of an ongoing partial government shutdown were seen as limiting risk appetite in the short term.

"Risk sentiment will improve, I think, once we get through these two events over the next few weeks," Rajappa said.

Bond yields and US stocks have gained since Federal Reserve Chairman Jerome Powell on Friday sought to ease market concerns that the US central bank was ignoring signs of an economic slowdown, saying he was aware of the risks and would be patient and flexible in policy decisions this year.

That came after a strong jobs report for December where employers added 312,000 workers to their payrolls, the most in 10 months, while average hourly earnings rose 11 cents, or 0.4 percent.

Benchmark 10-year notes fell 7/32 in price on Tuesday to yield 2.705 percent, up from 2.682 percent on Monday. The yields fell as low as 2.543 in overnight trading on Thursday before the jobs report, which was the lowest since January 2018.

The yields have tumbled from 3.05 percent at the beginning of December as concerns about slowing international growth and Fed rate increases prompted a sharp selloff in stocks.

Market volatility has increased expectations that the US central bank will not raise rates again this year and interest rate futures traders are even pricing for the possibility of a rate cut, even though the Fed has signaled that two rate hikes are likely.

Investors will be looking for new clues on interest rate policy when the Fed releases minutes from its December meeting on Wednesday and in a speech on Thursday by Powell.

The Treasury Department will sell $78 billion in coupon-bearing supply this week, beginning with $38 billion in three-year notes on Tuesday. The government will also sell $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday.