Bond Report: U.S. government bond yields edge lower as China-U.S. trade tensions remain in focus

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U.S. government bond yields edged slightly lower early Monday as escalating tensions between Washington and Beijing drove a flight to the perceived safety of Treasurys, which have pushed rates down.

President Donald Trump approved tariffs of 25% on about $50 billion of Chinese goods on Friday, drawing retaliatory measures by China on U.S. goods of the same value.

Trade jitters also saw the futures for the Dow Jones Industrial Average DJIA, -0.34% and the S&P 500 index SPX, -0.10% firmly lower early Monday, with Dow futures YMU8, -0.86%  showing a triple-digit point drop.

Elevated trade tensions come after a string of central bank gatherings last week, highlighted by the Federal Reserve’s second rate increase in 2018, and its signaling of a more aggressive rate-hike path than had been expected for the remainder of the year, while the European Central Bank announced the eventual unwind of its massive bond-buying program, albeit, at a slower pace than many on Wall Street had expected.

The 10-year Treasury note yield TMUBMUSD10Y, -0.59% fell 1.5 basis points to 2.911%, while the 30-year bond yield TMUBMUSD30Y, -0.33% edged 1.1 basis points lower to 3.037%.

The two-year note yield TMUBMUSD02Y, -0.48% fell 1.2 basis points to 2.545%.

Bond prices move in the opposite direction of yields.

Meanwhile, a measure of the yield curve, the differential between two-year and 10-year Treasurys, stood at 36.6 basis points, or 0.366 percentage point, holding at the tightest spread since around 2007.

Another measure of that gap, the difference between the 5-year Treasury note TMUBMUSD05Y, -0.30%  at 2.789%, and the 30-year bond, stood at 24.8 basis points or 0.248 percentage point, also hanging around its tightest in 11 years.

The yield curve, which reflects the rate gap across all Treasury maturities and tends to slope higher because investors generally demand richer yields for lending for a longer period, has been an accurate predictor of recessions.

Jeff deGraaf, chairman of Reinaissance Macro Research, in a Monday research note said weekly reports from the Commodity Futures Trading Commission indicate that appetite for bonds is strong, implying that yields will contract further.

“Positioning data out of the CFTC shows a relatively low level of net-long positioning by large speculators,” he wrote. The technical analyst said recent readings are “mildly supportive to better returns over the next 3-months for bonds (lower yields).”

Looking ahead, traders are awaiting a June reading for a U.S. housing market that is slated to be released at 10 a.m. Eastern Time.

Check out: MarketWatch’s Economic Calendar

On the Federal Reserve front, incoming New York Fed President John Williams is due to speak in New York at 4 p.m. Eastern at a conference focused on reforming behavior in financial services.