Treasury yields rose Wednesday, extending this week’s climb, as investors looked past trade tensions and dealt with coming corporate debt supply.
The 10-year Treasury note yield TMUBMUSD10Y, +0.58% rose 3.3 basis points to 3.081%, close to the seven-year high at 3.109%. The 2-year note yield TMUBMUSD02Y, +0.30% added 1.3 basis points to 2.812%, a decadelong high, while the 30-year bond yield TMUBMUSD30Y, +0.61% advanced 4 basis points to 3.235%, close to a four-year high at 3.246%.
Bond prices move in the opposite direction of yields.
The bond market continued to see pressure as stocks across the world appeared to brush off growing trade tensions from the U.S.’s decision to slap a 10% tariff on $200 billion of Chinese goods, though those import duties will rise to 25% by the end of the year. China retaliated by imposing tariffs on $60 billion in U.S. exports, prompting a threat by President Donald Trump to target an even wider range of Chinese goods.
See: How trade-war fears have become less of a factor for stock-market investors
Asian stock markets extended their climb. The Japanese Nikkei NIK, +1.08% and the Shanghai Composite SHCOMP, +1.14% ended higher by more than 1%. This helped to alleviate demand for assets perceived as havens like U.S. government debt.
Analysts say tariffs can have contradictory consequences for the bond market. If they stoke price pressures, bonds can suffer, but if the economy slows from weaker trade, then bonds can thrive.
“We still believe that there is scope for a settlement sometime in the first half of 2019, risks that the trade war goes beyond our current assumptions have increased. Should this happen, the impact on the U.S. economy would likely be more meaningful,” said analysts at Deutsche Bank.
They estimated that if the U.S. slapped a 25% tariff on $250 billion Chinese imports, inflation could rise as much as 50 basis points, or 0.50 percentage point.
Some investors fear China will use other means than tariffs to retaliate against the U.S., with some suggesting the second largest economy could sell its Treasury holdings to push the U.S.’s borrowing costs higher. According to the widely-watched Treasury International Capitol report, China’s holdings of U.S. government paper fell to a six-month low of $1.17 trillion in July.
Bond buyers also sold their holdings of long-dated government paper to make room for an influx of corporate debt, accelerating this week’s yield climb. The investment-grade corporate bond market has seen $120 billion of fresh debt in September, on track to beat the $135 billion sold in the same month last year, according to Bank of America Merrill Lynch.
“Rising Treasury yields also reflect competition from a robust corporate bond new issue market,” wrote Jody Lurie, a corporate credit analyst at Janney Montgomery Scott.
On the data front, August’s housing starts rose 9.2% to an annualized pace of 1.282 million, above the forecast of 1.249 million from economists polled by MarketWatch.
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