By Karen Brettell
NEW YORK (Reuters) - Benchmark U.S. Treasury yields rose from three-year lows on Friday as investors evaluated how far damage from the U.S.-China trade war will spread, after the inversion of a key part of the yield curve this week raised fears of a U.S. recession.
Safe-haven government bond yields plunged this week, and the closely watched U.S. yield curve between 2-year and 10-year notes inverted for the first time since 2007 on Wednesday, sending stock markets sharply lower.
The inversion of that part of the yield curve has historically been a reliable indicator that a U.S. recession is coming in one to wo years.
Escalating tensions between the United States and China are weighing on business sentiment and adding to concerns that U.S. economic growth will slow more than previously anticipated.
“The market is attempting to gauge the extent, duration and magnitude of the fallout from the trade war,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.
As economic data worsens, central banks globally are expected to adopt increasingly dovish monetary policies to loosen financial conditions.
The Federal Reserve last month cut interest rates for the first time in over a decade and said further cuts may not be needed.
The bond market, however, sees a rate decrease at the U.S. central bank’s September meeting as a sure thing, with the only question being the size.
Interest rate futures traders are pricing in a 72 percent chance of a 25-basis-point cut and a 28 percent chance of a 50-basis-point one, according to the CME Group’s FedWatch tool.
Benchmark 10-year notes (US10YT=RR) fell 9/32 in price on Friday to yield 1.556%, after reaching a three-year low of 1.475% on Thursday. Continuing concern about economic growth may send the yields below record lows of 1.321% reached in July 2016.
Plunging yields across the globe, including negative rates in much of Europe, have sent investors to longer-dated debt to capture returns. Thirty-year Treasury bond yields fell to a record low of 1.916% on Thursday. They were last 2.008%.
Fed Chairman Jerome Powell is due to speak at the Fed’s economic symposium in Jackson Hole, Wyoming, on Aug. 23. His comments will be closely evaluated for any indications that he has changed his stance on further rate cuts.