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U.S. Treasury yields fell on Tuesday as bond buyers were inspired by signs that the U.K. Conservative Party may struggle to achieve a Brexit agreement, while progress toward a U.S.-China trade deal didn’t put much of a dent in haven assets.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, -1.07% fell 2.3 basis points to 1.741%, while the 2-year note rate TMUBMUSD02Y, -1.20% was down 1.9 basis points to 1.586%. The 30-year bond yield TMUBMUSD30Y, -1.25% slipped 3.2 basis points to 2.175%. Yields and Treasury prices move in opposite directions.
What’s driving Treasurys?
Despite a wave of positive comments on the prospect for a U.S.-China trade deal, the bond-market rallied slightly on Tuesday. China’s Ministry of Commerce Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke on Tuesday. According to a statement, both sides ad “reached consensus on how to resolve related problems.” President Donald Trump also said “we’re in the final throes of a very important deal” on Tuesday.
Adding to the bullish momentum, a poll showed that the Conservative Party’s lead against the opposition Labour Party could be narrowing ahead of a general election on Dec. 12. Reduced support could complicate the Conservative Party’s efforts to bring the U.K. out of the European Union’s ranks.
The 10-year yield for the U.K. government bond TMBMKGB-10Y, -6.31%, or gilt, finished 4.4 basis points lower at 0.648%.
Investors also faced U.S. economic data Tuesday morning. The trade deficit fell 6% to $66.5 billion in October, while the Conference Board’s consumer confidence index dropped from 125.5 from 126.1 in October. New-home sales slipped 0.7% in October to a seasonally adjusted annual rate of 733,000, from 738,000 in September.
Analysts said an auction for $41 billion of 5-year notes drew healthy appetite as government bonds rallied on Tuesday.
On monetary policy, Federal Reserve Gov. Lael Brainard said the central bank could put a ceiling in bond yields through Treasury debt purchases as a potential policy tool to combat future economic downturns. She also suggested the central bank could take up other measures such as inflation-targeting.
Fed Chairman Jerome Powell on Monday indicated low inflation meant that interest rate increases would not be necessary anytime soon. And Dallas Fed President Robert Kaplan said in an interview with CNBC that he expected the U.S.’s fourth-quarter economic performance to be weaker, ranging between 1.75% to 2%.
What did market participants’ say?
“Investors were looking for Dec 12 elections to clear the way for eventual Brexit, but only if Conservatives consolidate their leadership. Poll cracks at this stage remind traders of the perils that faced Theresa May’s ineffective coalition,” wrote Jim Vogel, an interest-rate strategist at FTN Financial.
“I don’t believe the Treasury market is betting against a deal, I just think participants are more muted in their expectations about how much the global economy will inflect higher upon a deal,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
