10-year Treasury yield drops the most in 6 months on fears trade disputes will slow economy

Equities have been an ‘only child’ in the stocks vs. bonds tug of war: CIO

The yield on the benchmark 10-year Treasury note dropped the most in six months on Thursday as anxieties of global trade dispute spurred a market sell-off.

The 10-year Treasury yield fell more than 8 basis points to 2.82 percent, its biggest one-day decline since September of last year. It dropped as low as 2.79 percent at one point. Bond yields move inversely to prices.

It was quite a violent turnaround from Wednesday's high of 2.93 percent which came shortly after the Federal Reserve's decision to raise interest rates.

The Dow Jones industrial average fell more than 700 points Thursday amid growing trade tensions. Declines of more than 5 percent in shares of both Boeing and Caterpillar — both of which could be hurt by a slowdown in the global economy — dragged on the blue-chip index.

Source: Factset

The slump in Treasury yields came as trade wars fear peaked, with President Donald Trump signing an executive memorandum imposing retaliatory tariffs on up to $60 billion in Chinese imports.

"This bid is coming from the potential for a trade war and tariffs directed at China," said Kevin Giddis, head of fixed income capital markets at Raymond James. "The early trade this morning was mostly short covering, but then it manifested itself into a safe haven bid."

Additional trade penalties against China would just weeks after President Donald Trump signed two proclamations that implemented tariffs on imported steel and aluminum.

Bill Gross: Amazed bonds haven't reacted more significantly to Fed

It initially looked as if bond yields would push to multiyear highs following the Fed's Wednesday rate hike, but Wall Street quickly corrected its reaction, unsure whether the economy could handle higher rates.


The central bank kept its rate outlook of three hikes for 2018 the same, with traders focusing on that as reason to bet the central bank will use caution before hiking further.

The central bank's monetary policymaking arm wrapped up the final day of its two-day meeting Wednesday by hiking the target federal funds rate by a quarter percentage point to 1.5 percent to 1.75 percent points.

"Even before the FOMC decision, there was considerable angst over the impending tariff measures against China," said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group. Fears of Chinese retaliation sparked a "flight to quality in the bond market, which has extended through this morning into a stock rout."


Following the announcement, the first under new chairman Jerome Powell, Treasury yields rose with the benchmark 10-year yield briefly topping 2.9 percent, before paring some gains.

"The other thing that came out of the Fed yesterday was the statement from Powell himself indicating that he isn't concerned that the economy is on the cusp of rapid inflation," said Craig Bishop, vice president of U.S. fixed income at RBC Wealth Management. The Fed's decision and trade fears play "into the fact that the short position in Treasurys has been building and any time you get a move against that you get some short covering."

—CNBC's Jeff Cox contributed to this report

WATCH: Need a lot of new buyers to keep Treasurys below 3%

Gonna need a lot of new buyers to keep Treasurys below 3%