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Treasury Rally Cools as Trump Signals China Trade Talks Back On

Masaki Kondo and John Ainger
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Treasury Rally Cools as Trump Signals China Trade Talks Back On

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A rally in Treasuries slowed to take 10-year yields off a three-year low after U.S. President Donald Trump said that China had asked to restart trade talks.

Benchmark U.S. yields steadied in New York after sliding to their lowest since July 2016 at 1.44% during Asian trading. Signs that talks could resume drew investors out of haven assets as weekend concerns faded that a bruising trade war will hamper global growth. German bonds slipped along with the yen and Swiss franc.

Trump said U.S. officials received two “very productive” calls from Chinese officials, hours after Beijing’s top negotiator publicly called for calm in response to tit-for-tat tariff increases. Still, overnight index swaps are pricing in at least two rate cuts by the Federal Reserve by the end of the year, after Chairman Jerome Powell warned Friday that the U.S. economy faces “significant risks.”

“This trade war is having more plot twists than a Quentin Tarantino movie,” Edward Moya, a senior market analyst at Oanda Corp. in New York, said in a note. “While President Trump appears determined to assert a dominant negotiation position as we were expecting to enter the possible final rounds of talks, he may have overplayed his hand.”

The latest comments emerging from the Group-of-Seven meeting on Monday in Biarritz, France are a turnaround from Friday’s escalation in the trade conflict, when China threatened to impose additional tariffs on $75 billion of American goods. That prompted Trump to say he’ll hike existing duties on about $250 billion in Chinese goods, while a new round of tariffs on $300 billion of goods will be taxed at 15%, up from 10%.

China also sought to bring a measure of calm back to markets on Monday, with Caixin reporting that Vice Premier Liu He said the two sides should seek to resolve the dispute through talks. While his comments helped to reverse yen gains, their impact will be limited unless the trade frictions between the U.S. and China are resolved, said Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments Japan.

U.S. 10-year yields were down two basis points at 1.51% by 12 p.m. in London and German bund yields gained one basis points to minus 0.66%. The Swiss franc fell 0.6% against the dollar, while the yen slipped 0.4% after rallying to the strongest in almost three years versus the dollar.

Goldman Sachs Group Inc. warned the worst might not be over for markets.

“Escalation of the trade war could extend the bond rally further, with increased probability that U.S. 10s revisit all-time yield lows set in 2016,” wrote a team of strategists at Goldman Sachs including Praveen Korapaty. “Cross-border flows into U.S. dollar fixed income, driven by a surge in negative yielding debt, may not moderate without broad improvement in data.”

Globally, the pile of negative-yielding debt has surged to roughly $16 trillion as major central banks increasingly turn dovish amid slowing growth. Treasuries have gained 8.4%, leaving them on track for their best annual performance since 2011, according to the Bloomberg Barclays U.S. Treasury Index.

Trump’s renewed criticism of Powell on Friday, coupled with his call to U.S. companies operating in China to consider leaving, had pummeled markets going into the G-7 weekend. This backdrop also sent a key slice of the yield curve, which is closely watched as a gauge of an impending recession, further into inversion as traders’ viewed the growth outlook as more dire and ramp up bets the Fed cuts.

The gap between three-month rates and yields on 10-year Treasury notes fell Monday to a low of minus 53 basis points, the most inverted since March 2007.

“The market expects substantial rate cuts but the Fed isn’t moving along that line,” said Naokazu Koshimizu, senior rates strategist at Nomura Securities Co. in Tokyo. “Short-dated yields are struggling to fall even amid concern over a deterioration in the U.S. economy, leaving the yield curve prone to inversion.

--With assistance from Filipe Pacheco, Stephen Spratt, Netty Ismail, Kazumi Miura, Chikafumi Hodo, John Ainger, Liz Capo McCormick and James Hirai.

To contact the reporters on this story: Masaki Kondo in Tokyo at;John Ainger in London at

To contact the editors responsible for this story: Ven Ram at, Michael Hunter, Neil Chatterjee

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