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Bond Report: Two-year Treasury yield logs biggest daily rise in five weeks after signs of trade progress

U.S. Treasury yields jump Tuesday after reports of progress in U.S.-China trade negotiations sap demand for safe assets like bonds. Read More...

Short-term U.S. Treasury yields jumped on Tuesday after reports of progress in U.S.-China trade negotiations sapped demand for safe assets like bonds.

How are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +2.27%  rose 3.8 basis points to 1.678%, marking its biggest daily rise since July 11. The 2-year note rate TMUBMUSD02Y, +5.35% surged 8.9 basis points to 1.667%, contributing to its sharpest daily increase since July 5. The 30-year bond yield TMUBMUSD30Y, +0.65%  was flat at 2.131%.

A widely-watched gauge of the yield curve’s slope, the spread between the 2-year Treasury note yield and the 10-year note yield narrowed to 2 basis points, its flattest level since 2007. A flatter yield curve can indicate investor worries that monetary policy remains too tight.

See: The 30-year Treasury bond yield is on the brink of falling to an all-time low

What’s driving Treasurys?

The United States Trade Representative announced it would winnow down the list of goods that are set to incur a 10% tariff on additional $300 billion of Chinese imports publicized earlier in August 1. A USTR spokesman said U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin had talked with Chinese Vice Premier Liu He over the phone.

“Certain products are being removed from the tariff list based on health, safety, national security and other factors and will not face additional tariffs of 10 percent,” according to the statement. “Further, as part of USTR’s public comment and review process, it was determined that the tariff should be delayed to December 15 for certain articles.”

The news of a de-escalation in the trade war overshadowed concerns about slowing economic growth and the potential for Beijing to crack down on protests in Hong Kong, one of Asia’s most important financial and trade hubs.

However, protests in the Asian financial center of Hong Kong showed few signs of ending, underpinning demand for safe haven bonds. Police clashed with demonstrators in Hong Kong International Airport as departing flights were cancelled for a second day in a row.

See: Protesters clog Hong Kong airport again after it reopens

Investor confidence in Argentina was also shaken after business-friendly Mauricio Macri President was defeated by populist Alberto Fernández in primary elections on Monday, suggesting a similar outcome in October’s presidential vote. On Monday, the Argentinian peso USDARS, +4.9299%   swooned 15% against the U.S. dollar and its stock market SPMERVAL, +10.56%   saw a 31% drop.

Read: How Hong Kong clashes could wallop the U.S. stock market

In economic data, the U.S. consumer price index for July increased by 0.3%. Its core gauge stripping out for energy and food prices also rose by 0.3%, pushing its yearly growth up to 2.2%. Analysts polled by MarketWatch had forecast core inflation to rise by 0.2%.

Stronger inflationary pressures can weigh on the value of a bond’s fixed-income payments.

Check out: Higher gasoline prices, rent boost cost of living in July, CPI shows, but inflation still mild

What did market participants’ say?

“There’s no real change in view from us. We don’t think you’re going to see a trade deal in the short-term horizon, we’ve seen various constructive comments here and there before,” said Scott Kimball, fixed-income portfolio manager at BMO Global Asset Management.

“The global economy is slowing and making the domestic economy the best game in town. So we expect inflation to be stronger than the current expectations that appear to be caused by overly pessimistic expectations for the U.S. economy,” wrote Bryce Doty, portfolio manager for Sit Fixed Income.

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