October 10, 2019 / 3:26 PM / a month ago

TREASURIES-Yields rise as U.S.-China trade negotiations begin

NEW YORK, Oct 10 (Reuters) - Treasury yields rose on Thursday morning amid hopes for a resolution in trade talks between the United States and China, alleviating some worries over slowing economic growth, as the two countries began a new round of negotiations in Washington.

Chinese Vice Premier Liu He said on Thursday that China was willing to reach agreement with the United States on matters that both sides cared about to prevent any further escalation, the state news agency Xinhua reported.

As the trade war enters its 22nd month, however, some investors highlighted the difficulty of using the rapidly shifting headlines on trade to direct investment strategy.

“A choppy overnight session driven by conflicting signals regarding trade negotiations highlights the difficulty in chasing every 5 basis point move in yields, in that the proximate justification can unwind just as quickly,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Also on Thursday, U.S. consumer prices were unchanged in September and underlying inflation retreated, but that did not bolster expectations that the Federal Reserve will cut interest rates in October for a third time this year amid risks to the economy from trade tensions.

“Although inflation continues to be a factor in the Fed’s reasoning behind recent rate cuts, we don’t see this month’s CPI reading changing the calculus for the Fed in the near-term,” wrote analysts at TD Securities.

Complicating matters for the Fed was further evidence of a strong labor market. Other data showed an unexpected decline in the number of Americans filing claims for unemployment benefits last week. Layoffs remained low even as companies were becoming hesitant to hire more workers because of a slowing economy.

The strong labor market helps explain why Treasury yields did not fall on the news of tepid inflation. Across maturities, yields rose in morning trade. The benchmark 10-year yield was up 6.4 basis points to 1.649%, with the two-year yield, a proxy for investor expectations of interest-rate moves, up 4.6 basis points to 1.520%.

Predictions that the Federal Reserve will cut interest rates by 25 basis points at its October meeting were 77.5% on Thursday morning, slightly lower than the 80.2% on Wednesday, according to CME Group’s FedWatch tool.

Later on Thursday, $16 billion of 30-year bonds will be reopened by the Treasury Department, the end of a week of heavy supply totaling $78 billion in notes and bonds. Ahead of the auction, 30-year yields were up 6.4 basis points to 2.150%. (Reporting by Kate Duguid; Editing by Bernadette Baum)

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