Bonds

Investors clamor for Treasurys on trade war, sending yields lower

U.S. President Donald Trump chats with Chinese President Xi Jinping in November 2017.
Andy Wong | AP

Treasury yields fell on Monday as investors fled the equity markets for the relative safety of government debt, spooked by a soured trade relationship between the U.S. and China.

The flight to Treasurys sent long-term debt yields tumbling and inverted a portion of the yield curve, the set of interest rates of bonds having equal credit quality but differing maturity dates.

At 12:45 p.m. ET, the yield on the benchmark 10-year Treasury note dipped to 2.394%, under that of the 3-month Treasury bill at 2.418%. The 2-year yield also dipped to 2.182%. Yields move inversely to prices.

Inversions have preceded economic downturns in the past, though there is debate over which portion of the curve is the most important to monitor.

The Federal Reserve — as well as President Donald Trump's chief economic advisor Larry Kudlow — deem an inversion of the 3-month and 10-year curve as the critical metric.

Treasurys

China hiked tariffs on $60 billion worth of U.S. products earlier in the day, effective June 1. The charges target several U.S. agricultural products, including peanuts and beef. There were also concerns that China — the largest holder of U.S. debt — could start dumping Treasurys in retaliation, although experts said this would not be good for China's balance sheet.

The news led investors to load up on the traditionally safer Treasurys and away from riskier assets like stocks. The Dow Jones Industrial Average fell about 600 points while the S&P 500 dropped 2.3%.

"The market is likely to remain very headline driven, moving up or down on news that trade talks are improving or deteriorating," Keith Lerner, chief market strategist at SunTrust Private Wealth, wrote in a note. "The current backdrop should provide tactical opportunities but also supports maintaining a position in higher-quality fixed income."

China's move comes after the U.S. hiked tariffs on several Chinese imports last week. However, there was still some hope the two sides could reach an agreement after White House economic advisor Larry Kudlow said Sunday that Trump and Chinese President Xi Jinping are likely to meet at the June G-20 summit in Japan.

"Our base case remains for a resolution to the trade dispute. Both sides have plenty of incentive to avoid a breakdown of talks," said a team of UBS strategists led by Jeremy Zirin in a note. "We encourage investors to focus on the healthy economic fundamentals and the likelihood that the current trade spat will (ultimately) be resolved."