Optimism in trade dampens safe-haven demand, U.S. Treasury yields fall across the board
Driven by optimistic expectations of a forthcoming trade agreement between China and the United States, market demand for safe-haven assets has weakened, leading to selling pressure on U.S. Treasuries. The yield on the 10-year benchmark U.S. Treasury bond briefly rose to 4.04%, reaching a new high in over a week. Analysts point out that investors are closing out their blind pursuit of safe-haven assets, resulting in significant market volatility, with traders closely monitoring Federal Reserve policies and the outcomes of the U.S.-China presidential meeting. Despite the government shutdown causing a lack of economic data, the market has almost priced in a reduction in the Federal Reserve's benchmark interest rate
According to Zhitong Finance APP, driven by optimistic expectations of an impending trade agreement between China and the United States, market risk aversion has weakened, leading to selling pressure on U.S. Treasuries. After negotiators from both countries reached a series of agreements on tariffs and export controls, the yield on the 10-year benchmark U.S. Treasury bond rose by 4 basis points to 4.04%, reaching a new high in over a week; the yields on the 5-year and 2-year U.S. Treasury bonds also increased by 3 basis points, as improved risk sentiment partially offset market expectations for a rate cut by the Federal Reserve this week.
Anna Wu, cross-asset investment strategist at VanEck Australia, pointed out that the decline in U.S. Treasuries is due to investors closing positions on the narrative of "blindly chasing safe-haven assets amid deteriorating China-U.S. trade relations." However, yields may remain range-bound before further negotiations, and any significant changes could trigger a reflexive safe-haven buying spree again.
Currently, the market is experiencing high volatility, with traders closely monitoring the Federal Reserve's policy decision and the outcome of the China-U.S. presidential meeting, while this round of selling coincides with market opening hours. If negotiations hit a stalemate or there are unexpected central bank rate decisions, the selling pressure on U.S. Treasuries could quickly reverse, exacerbating macro trading volatility this week.
It is noteworthy that the U.S. government shutdown has set the second-longest record in history, leading to the absence of key economic data and further amplifying interest rate position risks. Nevertheless, overnight index swap trading indicates that the market has almost priced in a rate cut by the Federal Reserve this week and in December.
Strategist Garfield Reynolds analyzes that, in the context of the Federal Reserve preparing to cut rates and end quantitative tightening, along with the ongoing government shutdown, the decline in U.S. Treasuries may be smaller than that of most other bonds.
Market participants are currently focusing on controllable factors, with optimistic trade expectations becoming a significant theme. Hidehiro Joke, senior bond strategist at Mizuho Securities in Tokyo, emphasized that progress in trade negotiations is a key driver of risk appetite, leading to moderate selling of U.S. Treasuries
