Treasury yields notch biggest daily drop in three months

Two- and 10-year US Treasury yields on Thursday recorded their biggest daily drop since Aug. 5 on trade fears and in the wake of an interest rate cut by the US central bank.

The benchmark 10-year yield was 10.9 basis points lower at 1.688% in afternoon trade on reduced investor appetite for risk. Chinese officials expressed doubts about whether it would be possible to reach a comprehensive long-term trade deal with Washington, Bloomberg reported on Thursday, citing unnamed sources.

The two-year yield typically moves in step with interest rate expectations. That made its fall by 10.6 basis points to 1.524% on Thursday unusual in that it came a day after the Federal Reserve's signal that it would pause monetary easing following its October interest-rate cut.

Traditionally the Fed's signals on pausing rate cuts tend to stabilize the yield on the two-year note, said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.

But Thursday's trading suggested investors may still view the two-year US note as a better place for their money.

"When you look at most of the world, what people are paying to store their money, that's pretty attractive," Tipp said of the two-year note's rate.

The spread between two- and 10-year yields stood at 16.2 basis points Thursday afternoon, down from a close of 17.2 basis points on Wednesday. The flattening yield curve indicates market participants believe the US Federal Reserve may be pausing its interest rate cuts too soon.

Business investment has contracted for two straight quarters because of Trump's trade war with China. Market participants are concerned that weakness could spill into the labor market and hit consumer spending.

Data released early Thursday showing a marginal rise in consumer spending in September cast doubts on consumers' ability to continue driving the economy as business investment slumps.

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, gained 0.2% last month, powered by the lowest unemployment rate in nearly 50 years.

The report also showed that inflation was tame in September. Consumer prices, as measured by the personal consumption expenditures price index excluding the volatile food and energy components, also known as core PCE, was unchanged last month after gaining 0.1% in August.