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U.S. Treasury yields on Tuesday edged up slightly as Wall Street prepared to close out the final trading session of 2019, which has been marked by strong rallies for stock markets and a Federal Reserve that has supported gains in both bonds and equities.
Bond and stock markets will be closed on Wednesday for New Year’s Day on Wednesday, but a regular session will be observed Tuesday.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, +2.15% edged up 1 basis point to 1.904%, while the 2-year note rate TMUBMUSD02Y, +1.26% was down by 0.2 basis point to 1.569%, hanging around its lowest since Dec. 3.
On Monday, the widening yields between the two maturities briefly steepened the yield curve to around 34 basis points, its most positive levels since October 2018. A steeper curve can indicate brewing expectations for a bump in economic growth and inflationary pressures.
Meanwhile, the 30-year bond yield TMUBMUSD30Y, +2.13% climbed up 2.2 basis points to 2.364%.
What’s driving Treasurys?
Bonds and stocks over the past several weeks have mostly been taking their cues from reports on a phase-one U.S.-China trade deal, which has helped to boost forecasts for global economic growth. Investors have recently sold bonds and the U.S. dollar in anticipation of a deal between Beijing and Washington being struck.
Indeed, early Tuesday, President Donald Trump via Twitter said he would sign a so-called “phase one” trade deal with China at the White House on Jan. 15 and that he will head to Beijing to begin negotiations on a second phase of Sino-American discussions.
The President’s comments came moments before White House adviser Peter Navarro described a signing of the partial resolution as “in the bank,” during a CNBC interview.
Fixed-income markets also have been responding to the Federal Reserve’s expansion of its $4 trillion balance sheet to support short-term money markets and foreign investment in bonds, amid worries about flagging global economic growth.
What are market participants saying?
“Whether its due to the Fed’s expansion of their balance sheet, the ever growing US deficits (both trade and budget), the rise in yields overseas, or other things, I do believe this will be a key story in 2020. And if correct that the dollar continues to weaken, the flow impact could be large,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a Tuesday research note.
“To name a few, foreigners have piled into US corporate credit markets on an unhedged basis and just recently unhedged in the US Treasury market who will both get squeezed and could reverse with higher US rates,” he said.
