Bond Report: Treasury yields surge on report of tariff deal as trade optimism slams bond-market

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U.S. Treasury yields climbed on Thursday following reports that the U.S. could trim existing import tariffs on Chinese goods, as well as delaying those set to kick in on Sunday, reducing the risk that President Trump’s trade war will further undermine global economic growth.

What’s driving Treasurys?

The 10-year Treasury note yield TMUBMUSD10Y, +5.95%   jumped 9.9 basis points to 1.889%, a one-month high. The 2-year note rate TMUBMUSD02Y, +4.57%  rose 5.3 basis points to 1.668%, while the 30-year bond yield TMUBMUSD30Y, +4.48%  climbed 9.9 basis points to 2.319%.

What are Treasurys doing?

Trump said in a tweet early Thursday that the U.S. was “getting very close” to a trade deal with China and reports say the president is meeting with his trade advisors currently. A report by Bloomberg News later said the U.S. had agreed on terms of a phase-one agreement, and only awaited Trump’s signature.

A Wall Street Journal report said the American side had offered to cut existing tariffs by as much as half as well as canceling the upcoming round of duties set to take effect on Dec. 15 in return for Beijing’s commitment to buy large amounts of U.S. farm goods, citing those briefed on the matter.

The positive trade sentiment drove bond yields and stocks higher on Thursday, with major equity benchmarks all hitting fresh intraday records. Lower debt prices also helped draw investor demand for an auction of 30-year government bonds.

On monetary policy, the European Central Bank confirmed that monetary policy would stay “highly accommodative,” in the first meeting presided by the central bank’s new president Christine Lagarde. The ECB did not tweak any policy measures, leaving its benchmark deposit rate at a negative 0.50%.

See: ECB’s Lagarde says European economy facing fewer risks

The Fed kept interest rates on hold, as expected, on Wednesday at a range between 1.50% to 1.75%. More importantly, investors keyed into Fed Chairman Jerome Powell’s remarks suggesting interest rates would stay lower for longer. He said it would take a sustained increase in inflation to shift the interest rate trajectory higher.

In economic data, U.S. jobless claims rose to 252,000 for the week ending in Dec. 7 but the data was affected by the Thanksgiving holiday. Meanwhile, producer prices in November held steady, falling below analyst expectations for an 0.2% increase.

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What did market participants’ say?

“Markets are looking for any reason to feel good,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities.

“Most importantly here is the signaling of a calm down in tensions and hopefully a path to eventually getting rid of all these tariffs upon China complying with our demands,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group.

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