February 21, 2019 / 5:46 PM / in 8 months

TREASURIES-Yields rise despite soft U.S. data, on trade talk progress

(Recasts, updates yields)

By Kate Duguid

NEW YORK, Feb 21 (Reuters) - Treasury bond yields rose on Thursday on news of progress in U.S.-China trade talks, and as soft U.S. economic data was attributed to the abnormal factors of a federal government shutdown and the trade war.

Thursday’s U.S. data reports showed declining business spending, a contraction in manufacturing and a slowing labor market. Investors regarded the dramatic drops as side effects of political events which have been or will soon be resolved.

Leaders from Beijing and Washington have started to outline commitments in principle on the stickiest issues in their trade dispute, marking the most significant progress yet toward ending a seven-month trade war, according to Reuters sources familiar with the negotiations.

The two sides remain far apart on demands made by U.S. President Donald Trump’s administration for structural changes to China’s economy. But the broad outline of what could make up a deal is beginning to emerge from the talks, the sources said, as they push for an agreement by the March 1 deadline.

The Philadelphia Fed said on Thursday its gauge of U.S. Mid-Atlantic business activity declined in February to its weakest level since May 2016, suggesting a contraction in the region’s manufacturing sector.

Investors cautioned against attaching too much significance to the number. “We read the sharp drop in February orders and shipments alongside a modest inventory build as likely reflecting the effects of the federal government shutdown,” wrote Michael Gapen, chief U.S. economist at Barclays Capital.

He said he expected a rebound in business conditions in March amid “largely stable forward-looking assessments.”

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.7 percent. Slower business spending could crimp economic growth. Data for November was also revised downward.

“Based on survey data, uncertainty about the direction and duration of the trade war has been creating uncertainty and consequential delays in investment decisions,” wrote Ward McCarthy, chief financial economist at Jefferies.

The number of applications for U.S. unemployment benefits fell last week, the Labor Department said on Thursday, but the four-week moving average rose to a one-year high, indicating a slowdown in the labor market.

The yield on the benchmark 10-year government note rose 4.3 basis points, last trading at 2.695 percent. The two-year government note was up 3.1 basis points at 2.533 percent. At the end of the yield curve, the 30-year bond yield was last up 4.9 basis points at 3.047 percent. (Reporting by Kate Duguid; Editing by David Gregorio and Richard Chang)

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