Yields rise on trade hopes; curve modestly steeper

NEW YORK: US Treasury yields climbed on Tuesday amid reported progress in Washington's trade talks with both Beijing and Brussels.

Yields at the long end of the curve moved more than those at the short end, tempering a curve flattening trend as the market awaited Federal Reserve Chair Jerome Powell's congressional testimony on Wednesday which will be mined for insight into an interest rate cut that markets are expecting this month.

The 30-year Treasury bond yield was last up 1.7 basis points to 2.537pc, approaching levels hit Friday following the report of stronger-than-expected employment growth in June.

The 10-year yield was up 1.7 basis points to 2.051pc, while at the short end, the two-year yield was up less than half a basis point.

The United States and China are set to relaunch trade talks this week after a two-month hiatus, bolstering yields.

White House economic adviser Larry Kudlow on Tuesday said China was expected to move forward with agriculture purchases from the United States even as trade talks continued between the two countries.

Kudlow also said that talks with the European Union to move forward on a trade agreement were in progress.

The spread between two- and 10-year yields, the most commonly used measure of the yield curve, fell in early trade to 14.2 basis points, its lowest since May 31. Helped by trade optimism, however, the spread has moved higher in mid-morning trade, last at 16.7 basis points.

It nevertheless remained below the floor of June's trading range.

The "expectation that we would get a weaker than expected payrolls number (has) thrown traders off their game, at least for now.

Today and the rest of this week we will give heavy weight to what the Fed says," said Kevin Giddis, head of fixed income capital markets at Raymond James.

Powell will deliver the Fed's semiannual monetary policy report to the House of Representatives Financial Services Committee on Wednesday, followed by testimony before the Senate Banking Committee on Thursday.

"With a 50 basis point cut pretty much off the table, the market clings to a 25 basis point cut, but the Fed holds the cards, and for now, gets to play them as they wish," said Giddis.

The Treasury Department, on Tuesday afternoon, will auction off $38 billion in new three-year notes. Auctions of $24 billion 10-year notes and $16 billion 30-year bonds are scheduled for later this week.