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The yield on the benchmark 10-year Treasury note fell to its lowest level since 2016 on Thursday after President Donald Trump announced new tariffs on Chinese goods.
The president said on Twitter that 10% duties will be imposed on $300 billion worth of Chinese goods, effective Sept. 1. Trump's tweets came after a U.S. delegation met with Chinese trade officials earlier this week.
At around 2:30 p.m. ET, the yield on the benchmark 10-year Treasury note had fallen approximately 15 basis points to 1.878%, its lowest level since November 2016. The yield on the 30-year Treasury bond, which clinched its lowest level since October 2016 on Thursday, last traded at 2.428%. It hit a low of 2.422% earlier in the session.
"The tweet is bringing back the 'trade war' risk that markets have dealt with at various times over the past year. My guess is it is a negotiating tactic, but markets are concerned as the stakes are high and there is a chance it backfires,"said Arthur Bass, managing director of fixed income financing, futures, and rates at Wedbush Securities.
"Fed fund futures are now fully pricing two additional 25bp moves this year, although that could easily reverse if the risk-off move abates," Bass added. "With today's move, fixed income investors will no doubt be positioned a bit long going into tomorrow's employment release," when the government will announce July's jobs data.
Yields were also under pressure Thursday after the Federal Reserve in the prior session cut interest rates for the first time since 2008.
In approving the cut, the FOMC pointed to "implications of global developments for the economic outlook as well as muted inflation pressures." It also characterized economic growth as "moderate" and the labor market "strong," but eased policy regardless.
The 2-year Treasury note yield, more representative of changes to Fed policy, fell 16 basis points to 1.72%, off an earlier low of 1.694%, its lowest since November 2017.
The policymaking committee made explicit reference to inflation, a threat to bonds as rising prices chip away at the real value of their fixed payments.
"Overall inflation and inflation for items other than food and energy are running below 2 percent," the FOMC added. "Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed."
Fed Chairman Jerome Powell also confused investors with comments that the central bank's decision in July did not guarantee additional cuts before the end of 2019.
"We're thinking of it essentially as a midcycle adjustment to policy," Powell said following the release of the Fed's decision. "What I said was it's not the beginning of a long series of rate cuts. I didn't say it's just one or anything like that."
"When you think about rate-cutting cycles, they go on for a long time and the committee's not seeing that," he added.
Powell's "press conference was not as smooth as I know they can be," said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management. "He clarified that this wasn't the beginning of a long easing cycle and that threw some reality into the market."
Going forward, "I think they're also going to be cognizant of global trade tensions, which was sort of the ignition of market's expectations of rate cuts," Pollack added. "[Trade policy's] certainly out of their hands, but the think the Fed allowed the market to push them into these easing expectations."
The federal funds rate target range is now 2%–2.25%.
The number of Americans filing applications for unemployment benefits increased last week, but the trend in claims remained consistent with tightening labor market conditions.
Claims for state unemployment benefits rose 8,000 to a seasonally adjusted 215,000 during the week ended July 27, the Labor Department said on Thursday.
— CNBC's Jeff Cox contributed reporting.