US prices slide, dip likely short-lived on trade fears

24 May, 2019

NEW YORK: US Treasury prices fell on Friday as investors booked profits from the previous day's steep rally, although the decline was seen as a blip as the festering US-China trade conflict could fuel further safe-haven buying.

Volume thinned ahead of a long holiday weekend, with the market closed on Monday for Memorial Day.

"Risks are skewed toward lower yields with the prospects of a prolonged trade war," said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.

China on Friday denounced US Secretary of State Mike Pompeo for fabricating rumors after he said the chief executive of China's Huawei Technologies Co Ltd

 

was lying about his company's ties to the Beijing government.

The United States placed Huawei on a trade blacklist last week, effectively banning US firms from doing business with the world's largest telecom network gear maker.

US Treasury prices surged on Thursday, as yields fell to multi-month lows on the worsening trade tension between the world's two largest economies. On Friday, however, those yields climbed back from their lows on profit-taking, said Tom Simons, economist, at Jefferies & Company in New York.

"The combination of uncertainty and the impact on the Federal Reserve likely enhances what we suspected was already a strong appetite to buy any dip in the Treasury market," said NatWest Markets in a research note.

Some analysts said Friday's decline in bond prices could have also been fueled by comments from President Donald Trump late Thursday. He said US complaints against Huawei might be resolved within the framework of a US-China trade deal.

Analysts said Trump's comments provided some optimism about an eventual trade agreement.

The outlook for Treasuries and other sovereign bonds could also partly be determined by what happens in Britain and its acrimonious attempt to leave the European Union.

British Prime Minister Theresa May said on Friday she would quit after failing to deliver Brexit, setting up a race to replace her.

Former Foreign Minister Boris Johnson has appeared to be the favorite to replace May and was first out of the blocks to say Britain should be prepared to leave the EU without a deal to force the bloc to offer a "good deal."

Johnson's emergence and his "no-Brexit" stance could be supportive for Treasuries overall, Jefferies' Simons said.

In afternoon trading, US 10-year note yields rose to 2.323% from 2.296% late on Thursday.

Yields on US 30-year bonds advanced to 2.751%, from 2.732% on Thursday.

On the short end of the curve, US 2-year yields were up at 2.168% from Thursday's 2.129%.

US yields came off their highs, however, after data showed new orders for US-made capital goods fell more than expected in April.

Copyright Reuters, 2019

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