Bonds

10-year yield drops to lowest since 2017 this week as trade war fuels economic worries

[U.S. markets were closed May 27, 2019 in observance of Memorial Day.]

Long-term government debt yields were set to finish the week near multiyear lows, held down by mounting concerns that the trade war between the U.S. and China could persist longer and curb GDP growth more than first thought.

The yield on the 10-year Treasury note posted a marginal gain in Friday's session after falling 10 basis points to a low of 2.292% on Thursday, its lowest level since Oct. 16, 2017. The 30-year U.S. bond yield also ticked higher on the week's final day of trading after tumbling about 8 basis points to its lowest reading in more than 17 months on Thursday.

The 10-year yield and the 30-year yield last traded at 2.324% and 2.753%, respectively. The 3-month Treasury bill returned 2.349%, keeping a portion of the yield curve inverted.

The U.S. and China have imposed tariffs on billions of dollars' worth of one another's goods since the start of 2018, battering financial markets and souring business and consumer sentiment.

While the Trump administration hiked the tariff rate on $200 billion of Chinese goods to 25% from 10% on May 10, China struck a cooler tone in its criticism of the U.S. Ministry of Commerce spokesperson Gao Feng said: "If the U.S. would like to keep on negotiating it should, with sincerity, adjust its wrong actions. Only then can talks continue."

Then, the U.S. added Chinese telecom giant Huawei to it's so-called "Entity List" — effectively banning the company from acquiring technology from U.S. firms, chilling relations between the globe's two largest economies further.

"I think trade certainly is a big issue. There's been a tendency for people in the analyst world to say that this is noise, it will work out and we'll go back to a more 'normal' environment," said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. But "as it's played out, it's looking more and more that it could drag out a long time and have economic effects here and abroad."

"When two sides get dug in like this, it looks like they're willing to take the pain," she added.

Treasurys

Still, most of the week-to-date fall in yields, which fall as bond prices rise, occurred on Thursday after economic data in Europe hinted at softer export demand, a major component of euro zone GDP. Investors upped their bond purchases later in the day following two U.S. reports on business activity in the manufacturing and services sector and housing that suggested a weaker economic outlook.

On Thursday, four Federal Reserve officials said escalating trade tensions could threaten economic growth. The comments were in stark contrast to Chairman Jerome Powell's remarks on Monday, when he said it was too early to ascertain the impact of trade on the trajectory of monetary policy.

— CNBC's Sam Meredith contributed to this report.