Yields on US government bonds tick up

Yields on US government bonds rose modestly on Monday, as risk assets rallied off the weekend announcement that the United States and Canada had reached a deal to save NAFTA as a trilateral pact with Mexico.
Yields at the long end of the curve benefited most, with the 30-year bond yield last up 3.7 basis points from Friday's close to 3.234 percent and the 10-year yield up 2.6 basis points to 3.082 percent. The short end of the curve was little affected, with the two-year yield up less than half a basis point in afternoon trade.
Sunday's agreement will preserve the three-country pact, rescuing a deal that underpins a $1.2 trillion open trade zone that had been about to collapse after nearly a quarter century. The North American Free Trade Agreement (NAFTA) will become the United States-Mexico-Canada Agreement (USMCA).
The government debt market moves were muted compared with gains in the equities market, however. The S&P 500 index up 14.04 points from Friday's close and the Dow Jones Industrial Average was up 214.45 points.
"We've come out of the weekend in a positive risk environment. Treasuries, however, have been relatively unchanged," said Brian Daingerfield, macro strategist at NatWest Markets in Stamford, Connecticut.
Analysts suggested several reasons for the muted reaction of Treasuries. First, the Treasury market is primarily taking its cues from US economic data, which remains strong enough that traders may have concluded that trade tensions would not have had a significant impact on the American economy.
"(The trade agreement) is a positive, and you've seen risk assets respond, and you've seen Treasuries respond a bit, but US fundamentals are so strong right now that the effects of these negotiations had already been priced in," said Mike Lorizio, senior fixed income trader at Manulife Asset Management in New York.
That theory was supported this morning with the release of solid ISM manufacturing data. The measure of US factory activity retreated from a more than 14-year high in September as growth in new orders slowed, but supply bottlenecks appeared to be easing, suggesting a steady pace of expansion in manufacturing. The data bumped yields up modestly in mid-morning trade.
Also restraining yields were euro zone worries about Italy's 2019 budget, which could significantly increase the country's debt. As Italian government bonds sold off, prices on safe-haven US bonds rose.
The move in longer-dated yields steepened the curve, with the spread between two- and 10-year yields up nearly 2 basis points to 25.5. The spread between the five- and 30-year yields was also up 2 basis points, to 27.2.