US Treasury yields retreated on Friday on reports President Donald Trump has instructed aides to proceed with tariffs on about $200 billion more Chinese goods, despite Treasury Secretary Steven Mnuchin's attempts to restart trade talks with China.
Yields at the long end of the curve made the biggest moves. The yield on the benchmark US 10-year Treasury note fell by as much as 2.2 basis points after earlier breaking above the key technical level of 3 percent for the first time since early August.
The 30-year yield fell by as much as 2.6 basis points. "Was anyone particularly shocked that the news came out today that the president wants to hold on to these tariffs going into the talks? I was surprised that the market was shocked by it," said Ellis Phifer, market strategist at Raymond James.
The price of 10-year Treasury futures rose as bets against 10-year Treasury futures by hedge funds were at record levels. The 10-year futures market saw the day's heaviest burst of trading, helping explain the reaction in yields. "Equity markets tend to be more emotional, so that was probably the biggest issue," said Ellis. "The bond market took it more from a short-term allocation out of equities."
The 10-year US Treasury yield earlier broke above 3 percent on solid economic data and signs the Federal Reserve was likely to raise interest rates another two times in 2018. On Friday morning Chicago Fed President Charles Evans delivered a message viewed as more hawkish than previous statements, saying rate hikes would begin to weigh on the US economy next year and that it was normal. He added that it was premature to read too much into the flattening yield curve.
As recently as this spring, Evans had argued the Fed should stop raising rates to allow inflation to rise to 2 percent. Strong data had kept yields afloat this week as the Treasury Department auctioned $144 billion in fresh supply. On Wednesday, $23 billion of 10-year notes were sold to strong demand. The response to Tuesday's auction of three-year notes and Thursday's of 30-year bonds was solid. The 10-year yield was last at 2.990 percent, with the 30-year at 3.128 percent. The two-year note yield was last at 2.782 percent, a session high.