Treasury prices rose, pushing yields lower, Thursday as investors rushed into haven assets like U.S. government paper after problems in emerging markets and recent reports saying President Donald Trump would go ahead with tariffs on China next week.
The 10-year Treasury note yield TMUBMUSD10Y, -0.07% fell 2.2 basis points to 2.860%, after the benchmark maturity touched an intraday high of 2.888%. The 2-year note yieldTMUBMUSD02Y, -0.15% fell 2.4 basis points to 2.653%, snapping its five straight sessions of yield gains, while the 30-year bond yield TMUBMUSD30Y, -0.15% dipped 2.2 basis points to 2.860%. Bond prices move in the opposite direction of yields.
Investors fled from stocks into the perceived safety of Treasurys as trade tension came to the fore. Bloomberg News said President Donald Trump plans to impose $200 billion worth of tariffs on Chinese imports next week, according to people familiar with the matter. The Bloomberg report said Trump plans to slap the import levies on China once the deadline for public comment on the tariffs passes on Sept. 6, but that the president had yet to complete his decision. The S&P 500 SPX, -0.44% and the Dow Jones Industrial Average DJIA, -0.53% ended lower.
Meanwhile, emerging markets came under renewed pressure. The Argentine peso USDARS, -0.0150% resumed its slide after President Mauricio Macri said he planned to tap into the $50 billion credit line provided by the International Monetary Fund. The Turkish lira USDTRY, +1.5203% slumped after the deputy governor of the Turkish central bank resigned, amid questions over the monetary authority’s independence and wherewithal to hike rates. Both currencies are down more than 75% this year.
“Right now there is a decent overhang in the market which is keeping a lid on Treasury yields. Basically it has to do with what’s been going on with trade tariffs and emerging markets, as that sorts itself out,” said Jason Celente, senior portfolio manager for Insight Investment’s fixed income group.
Adding to the demand for risk-free government paper, investors struggled to take down a multibillion euro auction for Italian debt over concerns that the Italian government would bust the budget caps mandated by the European Union. The 10-year Italian government bond yield TMBMKIT-10Y, +0.00% jumped 8.4 basis points to 3.215%, its highest rate since 2014, while the 10-year German bond yield TMBMKDE-10Y, +0.00% fell 4.8 basis points to 0.358%, according to Tradeweb data.
On the data front, core PCE inflation, which strips out for energy and food prices, rose 0.2% to clinch a year over year climb of 2%, for the first time since 2012. But the bond market showed little response to July’s reading of personal-consumption expenditures price index, even though inflation can erode the value of a bond’s fixed-income payments.
That’s in part because economists view the achievement of a 2% target as ultimately fleeting, brought about by one-off boosts such as a boost in health-care spending from increases to Medicare pricing and increased spending from Americans recovering from last year’s hurricanes.
“The bottom line is 2% is the peak,” said Omair Sharif, senior U.S. economist for Société Générale.
Still, with inflation heading back to 2%, more investors may start to anticipate a rate increase in December, with traders having mostly priced in a September hike. Economists at Goldman Sachs said Fed Chairman Jerome’s Powell speech last week at a central banker symposium in Jackson Hole, Wyo., didn’t point to a slowdown in the expected pace of rate increases, despite his remarks on how an uncertain outlook for the global economy could complicate U.S. monetary policy.
“Fed officials apparently expect core inflation to rise no further from here, but we suspect those projections will prove too sanguine, particularly with wage growth starting to show clearer signs of acceleration. In that context, the Fed is likely to continue raising interest rates once a quarter,” wrote Andrew Hunter, U.S. economist for Capital Economics.