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10-year Treasury yield drops to 19-month low as trade fights threaten US growth

The yield on the benchmark 10-year Treasury note fell to a 19-month low Tuesday as Wall Street grew more certain that the U.S.-China trade war will last longer and afflict GDP growth more than first thought.

At around 3:33 p.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was lower at around 2.264%, off a 19-month low hit earlier in the session. The yield on the 30-year Treasury bond yield traded at 2.705%, off its lowest level since 2017; the 2-year Treasury note yielded 2.127%.

The 3-month Treasury bill yielded 2.356%, keeping a portion of the yield curve inverted. The German 10-year bund yield hit a low of -0.163%, its lowest level since Sept. 30, 2016.

The U.S. bond market was closed Monday in observance of Memorial Day.

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President Donald Trump said from Japan on Monday the U.S. was "not ready" to make a deal with China, adding to recent investor angst that the tit-for-tat trade war between the world's two largest economies is far from over.

Washington and Beijing have imposed tariffs on billions of dollars' worth of each other's goods since the start of 2018, battering financial markets and souring business and consumer sentiment. Most recently, the U.S. hiked the tax rate on $200 billion of Chinese imports to 25% from 10% and threatened to imposed stricter levies on another $300 billion worth of Chinese products.

That's kept a lid on Treasury rates in recent months as retailers, chipmakers and other trade-exposed sectors of the American economy scrambled to find new supply chains and relocate operations. But lowering interest rates — often applauded on Wall Street for their ability to encourage borrowing — may not be a positive sign in the current environment, according to Credit Suisse chief market strategist Jonathan Golub.

"Since troughing in late December, the S&P 500 has returned 20.2%, while 10-year Treasury yields have fallen from 2.74% to 2.32%. Simple math would suggest that falling rates contributed to this improvement in stock prices. However, a more thorough analysis challenges this consensus view," Golub said in a note Tuesday.

"Higher rates from here should support further upside for equities, while a potential Fed rate cut would be less positive for stock prices than many investors believe," he added.

A growing number of investors now believe that the U.S. central bank may have to cut its overnight lending rate later in 2019 as the waning effects of Trump's tax cuts and mounting trade disputes weigh on economic forecasts.

Fed Chair Jerome Powell, who first said in March 2018 that "there's no thought that changes in trade policy should have any effect on the current outlook," has more recently voiced greater concern about economic outlook in Europe and China. Twelve months following those initial comments on the Trump administration's trade tactics, Powell said that the weaker overseas outlook is dampening domestic growth estimates.

"Now we see a situation where the European economy has slowed substantially and so has the Chinese economy, although the European economy more," he said in March. "Just as strong global growth was a tail wind, weaker global growth can be a headwind to our economy."

Investors tracked by the CME Group's FedWatch tool believe the central bank is more likely than not to cut rates at least once by December.

The Treasury Department auctioned $40 billion in 2-year notes at a high yield of 2.125%. The bid-to-cover ratio, an indicator of demand, was 2.75. Indirect bidders, which include major central banks, were awarded 46.6%. Direct bidders, which includes domestic money managers, bought 27.2%.

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