U.S.-China trade row sends U.S. bond yields tumbling

By Richard Leong

NEW YORK (Reuters) - U.S. Treasury yields tumbled on Monday, with 10-year yields hitting the lowest since November 2016, as fears over escalating U.S.-China trade tensions renewed concerns about an economic downturn and spurred a fourth straight session of gains in bonds.

China allowed the yuan to breach the key seven-per-dollar level for the first time in more than a decade, a sign Beijing might be willing to tolerate more currency weakness that could further inflame the bilateral trade conflict.

Chinese state media said local firms have halted U.S. agricultural purchases, elevating anxiety about tit-for-tat moves by the world's two biggest economies. The Chinese measures followed U.S. President Donald Trump's threat last week to impose 10% tariffs on $300 billion of Chinese imports starting Sept. 1.

"There's a lot of fears out there," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co in New York. "What is the path that could end this? It doesn't seem we are going to get there anytime soon."

The growing trade friction seemed to have begun hurting the U.S. services sector on top of squeezing domestic manufacturers.

The Institute for Supply Management's index on U.S. services activity showed the vast economic sector's growth slowed to its weakest level in three years in July.

Anxious investors have been bailing from stocks and other risky assets with Wall Street's main stock indexes falling 2%.

They have favored U.S. government debt, the Japanese yen, gold and other perceived low-risk assets to park their money.

The Treasuries market recorded a total return of 1.31% last week, which was its biggest weekly gain since November 2011, according to an index compiled by Bloomberg and Barclays (LON:BARC).

In late U.S. trading, the yield on benchmark 10-year Treasury notes (US10YT=RR) was down 12.7 basis points at 1.7278%. It hit 1.728% earlier on Monday, the lowest since Nov. 9, 2016, the day after Trump was elected president.

The two-year yield (US2YT=RR), which is sensitive to traders' view on Fed policy, touched 1.571%, its lowest since November 2017. It was last 14.7 basis points lower at 1.5753%.

Interest rates futures implied traders fully expect the U.S. Federal Reserve to lower rates again at its Sept. 17-18 policy meeting after cutting them last week for the first time since 2008, CME Group's FedWatch program showed.

The difference between the three-month Treasury bill rate (US3MT=RR) and 10-year yields (US10YT=RR) grew to nearly 27 basis points, the widest since April 2007.

This curve "inversion" between the two maturities has preceded every U.S. recession in the past 50 years.

The blistering demand for Treasuries is expected to stoke bids for this week's quarterly refunding where the government will sell $38 billion in three-year debt, $27 billion in 10-year notes and $19 billion in 30-year bonds.

"I wouldn't expect to have a major impact on refunding," said Jon Hill, an interest rates strategist at BMO Capital Markets.

August 5 Monday 2:25PM New York / 1825 GMT

Price

US T BONDS SEP9 (USc1) 160-22/32 67/32

10YR TNotes SEP9 (TYc1) 129-220/256 32/32

Price Current Net

Yield % Change

(bps)

Three-month bills (US3MT=RR) 1.9675 2.0097 -0.054

Six-month bills (US6MT=RR) 1.9425 1.9885 -0.027

Two-year note (US2YT=RR) 100-84/256 1.5813 -0.141

Three-year note (US3YT=RR) 100-154/256 1.5398 -0.139

Five-year note (US5YT=RR) 101-10/256 1.5326 -0.137

Seven-year note (US7YT=RR) 101-166/256 1.6243 -0.127

10-year note (US10YT=RR) 105-184/256 1.7362 -0.119

30-year bond (US30YT=RR) 112-128/256 2.2933 -0.099

YIELD CURVE Last (bps) Net

Change

(bps)

10-year vs 2-year yield 15.40 2.35

30-year vs 5-year yield 76.00 3.75

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap -0.50 -3.00

spread

U.S. 3-year dollar swap -4.75 -3.50

spread

U.S. 5-year dollar swap -6.50 -2.75

spread

U.S. 10-year dollar swap -11.75 -3.25

spread

U.S. 30-year dollar swap -42.75 -4.25

spread