US Treasury yields fell on Wednesday as concerns about the US-China trade war boosted demand for safe haven debt and after data showed weakness in the US housing market. US President Donald Trump said on Tuesday the United States still had a long way to go to conclude a trade deal with China but could impose tariffs on an additional $325 billion worth of Chinese goods if it needed to do so.
The United States could also face Chinese sanctions for not fully complying with a World Trade Organization ruling, WTO appeals judges said on Tuesday. The Federal Reserve is seen as certain to cut rates when it meets later this month, as the US-China trade war weighs on the global economic outlook. US data on Wednesday showed homebuilding fell for a second straight month in June and permits dropped to a two-year low despite lower mortgage rates. Building permits tumbled 6.1% to a rate of 1.220 million units in June, the lowest since May 2017.
"The housing starts were a little weaker but the building permits were definitely significantly weaker," said Justin Lederer, an interest rates strategist at Cantor Fitzgerald in New York. Benchmark 10-year notes gained 17/32 in price to yield 2.06%, down from 2.12% late on Tuesday.
Yields have risen from more than 2-1/2 year lows reached earlier this month and the yield curve has steepened as recent data including jobs, inflation and retail sales data showed an improving US economy. The Fed on Wednesday reported "modest" US economic growth in recent weeks, with consumers continuing to spend, and a "generally positive" outlook overall even with disruptions from US trade policy.
The yield rise has been capped by dovish central bank policy globally. Strong demand for European government debt also boosts US Treasuries. US debt offers a significantly higher yield than comparable German government bonds, which traded at a yield of minus 0.29% on Wednesday. Interest rate futures traders are pricing in a 65% chance of a 25 basis point cut by the Fed this month and a 35% likelihood of a 50 basis point cut, according to the CME Group's FedWatch tool.