Global wrangling over tariffs is throwing a wrench into the 10-year Treasury yield’s advance beyond 3% as key deadlines approach in the growing spat between the US and its trading partners.
Trade tension will be in focus this week as the US prepares to release China investment restrictions by Friday and a July 6 deadline looms for both nations to apply import levies. The widening rifts between major economies are threatening global growth outlook just as the Federal Reserve has foreshadowed two more hikes in interest-rates this year. Bond traders are also cognizant of curve flattening, with new supply of seven-year notes potentially adding to risks of a partial curve inversion.
Yields on 10-year notes, which have largely held between around 2.85% and 3.00% this month, might climb if the trade situation improves. They could also receive a boost if economic data – such as personal income and spending figures due Friday – prove more robust than forecast. But there is also scope for sudden renewed risk aversion, as US President Donald Trump’s repeated Twitter threats underscore. Trade is also on the agenda of a European Union summit later in the week, while month-end duration needs may dull any meaningful move above 3%.
“All the focus is going to be plowed right back onto the trade controversy that continues to play out, given there is little on the calendar to distract the market,” said Tom Porcelli, chief US economist at RBC Capital Markets. “If we could clear the decks on trade, there are a host of positives about the US economy. But the noise on trade isn’t likely to go away anytime soon and if the rhetoric escalates, then it will be easy for yields to remain suppressed.”
The benchmark 10-year note yield has closed below 3% for the last twenty three trading sessions, moving in a range of 2.76% to 3.06%. The yield, at around 2.89% on Friday, is below its 50-day moving average, currently 2.95%.
The spread between 7- and 10-year yields is holding just a few basis points above the zero, and strategists warn the new sale of the shorter maturity debt this week could be the trigger to send the gap into negative territory, a potential harbinger of inversion further along the curve. The potential that trade skirmishes deepen prompted analysts at Bank of America last week to warn that 10-year yields may fail to reach their 3.25% year-end forecast.
“The rates market impact of an escalation of trade tensions will naturally depend on the depth and severity of tariffs and retaliatory actions, but recent rhetoric suggests trade escalation may need to get worse before it gets better,” Bank of America analysts, including Ralph Axel, wrote in a June 20 note. “Trade war escalation is unlikely to deter the Fed from near- term hikes but would likely result in a slower medium-term path and lower terminal rate.”
What to watch this week: The Treasury is expected by Friday to release investment restrictions on China. Fed will release on June 28 part 2 of its annual stress test results.
The yield curve maybe a topic among Fed officials speaking during the week. June 26: Atlanta Fed president Raphael Bostic speaks in Birmingham, Alabama; Robert Kaplan, head of the Dallas Fed speaks in Houston.
June 27: Boston Fed president Eric Rosengren gives a lecture at the Peterson Institute in Washington; Fed vice chairman for supervision Randal Quarles speaks in Idaho.
June 28: St Louis Fed president James Bullard speaks in St Louis; Bostic speaks in Atlanta. As for economic indicators, personal income and spending and the latest reading on the Fed’s preferred inflation gauge are the highlights.
June 25: Chicago Fed activity index; new home sales; Dallas Fed manufacturing.
June 26: S&P CoreLogic Case-Shiller home price indexes; Richmond Fed manufacturing index; Conference Board consumer confidence, present situation and expectations.
June 27: MBA mortgage applications; advance goods trade balance; retail and wholesale inventories; durable and capital goods orders; pending home sales.
June 28: Initial and continuing jobless claims; third reading of gross domestic product and personal consumption expenditure for the first quarter; Bloomberg consumer comfort; Kansas City Fed manufacturing.
June 29: Personal income and spending report for May, including core PCE and PCE deflator; Chicago purchasing managers index; University of Michigan sentiment, current conditions, expectations and inflation gauges.Treasury will auction bills and both fixed and floating-rate notes.
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