June 19, 2018 / 3:18 PM / 10 months ago

TREASURIES-Yields slide as U.S.-China trade tension heats up

    * Trump threatens additional tariffs on Chinese goods
    * U.S. housing starts surge in May
    * U.S. 5-year-, 30-year yield curve steepens

 (Adds new comment, housing starts data, updates prices in text,
    By Gertrude Chavez-Dreyfuss
    NEW YORK, June 19 (Reuters) - U.S. Treasury yields retreated
on Tuesday as trade tensions between China and the United States
intensified after President Donald Trump threatened to impose a
10 percent tariff on $200 billion of Chinese goods even as
Beijing warned it would fight back.
    U.S. 10-year and 30-year yields fell to three-week lows on
the news, while those on two-year notes slid to two-week
    Trump called his latest move retaliation for China's
decision to raise tariffs on $50 billion in U.S. goods, which
came after Trump announced similar tariffs on Chinese goods on
    "This is an unexpected move and clearly an escalation in
both trade war rhetoric and downside risk," said Chris Payne,
managing director at GWM Investment Management in London.
    He added, however, that an all-out trade war was unlikely.
    "It will not benefit anybody, especially China, whose
economy is going through a major deleveraging process," Payne
    U.S. benchmark 10-year yields fell to a low of 2.853 percent
, from Monday's 2.926 percent. They were last at
2.885 percent.
    The low in U.S. 10-year yields is approaching a key
resistance level of 2.849 percent - the 61.8 percent retracement
of June's sell-off, said Ian Lyngen, head of U.S. rates strategy
at BMO Capital in New York.
    He believes there is further momentum in the latest surge in
Treasury prices.
    U.S. 30-year yields dropped to 2.991 percent, a
three-week low as well, compared with 3.055 percent on Monday,
and were last at 3.018 percent.
    On the short end of the curve, U.S. two-year yields sank to
a two-week low of 2.496 percent, compared with 2.558
percent late on Monday. Two-year yields last traded at 2.536
    The yield curve, meanwhile, continued to steepen on Tuesday,
at least with respect to the spread between U.S. 5-year notes
and 30-year bonds. That spread widened to 26.90 basis points
    "A bull steepener is totally expected because a trade war is
said to cause stagflation, which could prevent the Federal
Reserve from further hiking rates," said Gennadiy Goldberg,
interest rates strategist at TD Securities in New York.
    Balancing out the threat of a trade war was a U.S. housing
starts report that came out better than expected. 
    Housing starts rose 5.0 percent to a seasonally adjusted
annual rate of 1.350 million units last month, the highest level
since July 2007.
    U.S. yields came off their lows after the data.
    Following the housing starts report, IHS Markit raised its
forecast for U.S. gross domestic product growth in the second
quarter by one-tenth to 4.6 percent. 
      June 19 Tuesday 11:04AM New York / 1504 GMT
 US T BONDS SEP8               144-9/32     0-23/32   
 10YR TNotes SEP8              119-236/256  0-84/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.9025       1.9383    0.011
 Six-month bills               2.0725       2.1235    -0.005
 Two-year note                 99-238/256   2.5369    -0.021
 Three-year note               99-244/256   2.6414    -0.033
 Five-year note                99-246/256   2.7583    -0.041
 Seven-year note               100-44/256   2.8474    -0.043
 10-year note                  99-232/256   2.8858    -0.040
 30-year bond                  102-20/256   3.0189    -0.036
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        26.00        -0.50    
 U.S. 3-year dollar swap        22.75         0.00    
 U.S. 5-year dollar swap        14.50         0.00    
 U.S. 10-year dollar swap        6.75         0.25    
 U.S. 30-year dollar swap       -6.25         0.00    
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Frances Kerry and Dan Grebler)
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