Bond Report: Treasury yields come off session highs as stocks pare early gains

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Treasury yields retreated from their intraday highs on Monday as stocks gave up a chunk of their opening gains after President Donald Trump struck a tentative deal with China’s leader Xi Jinping this weekend to delay a further increase in tariffs.

The Securities Industry and Financial Markets Association recommends the bond market close on Wednesday in honor of President George H.W. Bush.

The 10-year Treasury note yield TMUBMUSD10Y, -1.12% was down 0.9 basis point to 3.004%, after trading as high as 3.050% overnight. The 2-year note yield TMUBMUSD02Y, +1.02% was still up by a single basis point to 2.821%, while the 30-year bond yield TMUBMUSD30Y, -1.03% fell 1.2 basis points to 3.299%. Bond prices move in the opposite direction of yields.

At the G-20 summit, Xi and Trump agreed to postpone for 90 days a rise in tariffs that was originally scheduled for Jan. Heading into their meeting, Trump had repeatedly threatened to crank up import duties in China if their talks didn’t yield progress. Though, the agreement doesn’t resolve key issues in U.S.-China trade policy, such as the use of technology transfers, it could lead to a more comprehensive pact.

“This is certainly a great relief, and the downside risk to our global scenario is lowered somewhat. However, there remains many difficult discussions between the US and China, particularly on technology and intellectual property rights,” said analysts at Société Générale. “But it should not have any lasting impact on yields.”

See: U.S. to delay China tariffs after Trump-Xi dinner meeting at G-20 in Buenos Aires

Read: Trump says China will ‘reduce and remove’ 40% tariffs on U.S. auto imports

The temporary trade truce drew investors into stocks, even as bond buyers appeared less impressed. The Dow Jones Industrial Average DJIA, +0.62%  was up by around 200 points, after being up as much as 442 points at its session highs. The S&P 500 SPX, +0.53% was up by less than 1%.

As trade jitters dissipate, analysts say the market’s attention will return to the prospects for U.S. economy.

In its November survey of U.S. manufacturers, Markit reported business optimism was on the decline, with few firms now expecting an uptick in production next year. Yet, the Institute of Supply Management’s own manufacturing index for November rose to 59.3% from 57.7%, well above the 58% forecast from economists polled by MarketWatch. So far, factory activity has remained resilient to climbing labor costs and the increase in tariffs. A reading of at least 50% indicates improving conditions.

All the same, nascent pockets of weakness in U.S. growth will keep the Federal Reserve on their toes next year as policy makers attempt to normalize monetary policy.

Also check out: A rudderless Fed invites more stock-market volatility, analysts say

Dallas Fed President Robert Kaplan said the central bank should take caution as it contemplates further rate increases against a backdrop of lackluster inflation and softer global growth. Fed vice chairman for supervision Randal Quarles, however, clarified that the central bank’s data-dependent approach would only see the Fed react to “significant changes in direction” to economic data or markets.

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