Skip to main content

The U.S. yield curve inverted further on Monday with yields on shorter-dated yields rising more than longer-dated ones, as upcoming supply of shorter-maturity Treasury debt outweighed the easing of trade tensions between China and the United States.

The U.S. Treasury Department will sell $113-billion in fixed-rate debt supply this week, starting with a $40-billion auction of two-year notes on Tuesday.

Benchmark 10-year Treasury yields slid to 1.443 per cent earlier on Monday, their lowest since July 2016, as another round of tit-for-tat tariffs between the world’s biggest economies last week touched off a wave of safe-haven demand for low-risk government bonds.

On Friday, U.S. President Donald Trump announced an additional duty on some $550-billion of targeted Chinese goods, hours after China unveiled retaliatory tariffs on $75-billion worth of U.S. goods.

By Monday, Trump and Chinese leaders sought to ease trade tensions that triggered steep stock market sell-offs around the world. Trump told a press conference after the G7 summit in France: “I think they want to make a deal very badly.”

Analysts were not as optimistic.

“It’s a lot of mixed messages,” said Gennadiy Goldberg, senior interest rates strategist at TD Securities. “It’s hard to trade in this environment purely on data.”

Domestic orders for durable goods unexpectedly rose in July but shipments fell by the most in nearly three years, suggesting capital investment remained sluggish.

On the open market, yields on two-year notes fell as low as 1.449 per cent, their lowest since September 2017. They subsequently moved up 2.00 basis points to 1.549 per cent.

Ten-year Treasury yields were 1.540 per cent, 1.30 basis points higher on the day, rebounding from a three-year low of 1.443 per cent set earlier on Monday.

The inversion between two-year and 10-year yields deepened to -1.7 basis points from -0.2 basis points late on Friday.

The yield curve has often inverted prior to recent U.S. recessions.

The U.S.-China trade war has put the Federal Reserve in a tough spot as policymakers cite its disruption of global business activities as a risk to the domestic economy.

On Friday, Fed Chair Jerome Powell said the central bank would “act as appropriate” to sustain the longest-ever U.S. economic expansion. But he did not pledge that the Fed was ready to embark on a series of interest rate cuts.

Interest rates futures implied traders expect the Fed to lower rates by a quarter point at its Sept. 17-18 policy meeting, following its first rate decrease since 2008 in July.

Fed funds contracts suggested the Fed would cut rates at least one more time after September, CME Group’s FedWatch program showed.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe