- 10-year T-note prices move lower in sympathy with global bond sell-off
- Treasury continues this week’s refunding operation by selling 10-year T-notes
- China risks a breakdown of the phase-one trade deal by demanding tariff rollbacks
- Washington is moving towards deferring the near-term government-shutdown threat
10-year T-note prices move lower in sympathy with global bond sell-off — T-note prices have been pressured in the past several weeks by the sharp sell-off in key overseas bond markets. That sell-off has been driven mainly by hopes that the U.S. and China are close to signing a phase-one trade deal, which in theory would end the threat of any new U.S. tariffs and possibly even result in the roll-back of some existing tariffs. Global bond prices have also weakened on reduced safe-haven demand after the Brexit deadline was extended until January 31. Also, the chances for any further ECB easing are slim after the ECB’s aggressive easing move in September with the -10 bp rate cut and the restart of its QE program as of Nov 1.
The German 10-year bund yield on Tuesday rose to a 3-3/4 month high of -0.31%, up by a hefty +40 bp from the early-Sep record low of -0.71%. The UK 10-year gilt yield of 0.78% is just below the mid-Oct 3-3/4 month high of 0.79% and is up +44 bp from the early-Sep record low of 0.34%. Even the 10-year JGB yield early Wednesday rose to a 4-month high of -0.10% and is up by +19 bp from late-Aug 3-1/4 year low of -0.29%. The total amount of negative-yielding global debt has fallen sharply to $12.8 trillion from Aug’s record high of $17.0 trillion.
The 10-year Chinese government bond yield last week rose to a 5-month high of 3.34% and was up by +35 bp from the mid-Aug 3-year low of 2.99%. That rise in the Chinese bond yield has mainly been due to hopes for a US/Chinese trade deal and an end to the bleeding in the Chinese economy. However, the Chinese bond yield fell back to 3.25% on Tuesday after the Chinese central bank stepped in to support the Chinese bond market with a cut in its medium-term lending facility (MLF) rate by -5 bp to 3.25%, the first such cut since 2016 and a signal of easier liquidity.
T-note prices have also seen some downward pressure from the Fed’s guidance after last week’s rate cut that the Fed does not expect to cut rates again in this cycle. T-note prices have also seen weakness after the 10-year inflation expectations rate rose sharply since last Friday to post a new 7-week high of 1.67% yesterday.
Treasury continues this week’s refunding operation by selling 10-year T-notes — The Treasury today will sell $27 billion of new 10-year T-notes. The Treasury will then conclude this week’s $84 billion quarterly refunding operation by selling $19 billion of new 30-year bonds on Thursday. This week’s auction sizes are unchanged from the Treasury’s last refunding operation in August.
The 12-auction averages for the 10-year T-note are: 2.42 bid cover ratio, $16 million in non-competitive bids to mostly retail investors, 4.6 bp tail to the median yield, 28.4 bp tail to the low yield, and 59% taken at the high yield. The 10-year T-note is the fourth most popular security among foreign investors and central banks behind the three TIPS securities (5, 10 and 30). Indirect bidders, a proxy for foreign buyers, have taken an average of 62.3% of the last twelve 10-year T-note auctions, which is well above the median of 59.7% for all recent Treasury coupon auctions.
China risks a breakdown of the phase-one trade deal by demanding tariff rollbacks — Chinese officials are risking the breakdown of a phase-one trade deal as they seek last-minute tariff concessions. China is reportedly pressuring President Trump to scrap the upcoming Dec 15 tariff as well as to roll back the Sep 1 tariff of 15% on $110 billion of Chinese goods and even reduce the 25% tariff on the original $250 billion of Chinese goods.
China may be able to convince Mr. Trump to roll back the Sep 1 tariff, but it appears highly unlikely that it will get the 25% tariff reduced since that tariff will be Mr. Trump’s main cudgel for the phase-two trade talks. The markets would be very pleased if Mr. Trump rolls back the Sep 1 tariff since that would remove at least some of the downward pressure on the Chinese and global economies.
Yet Chinese officials run the risk of angering President Trump if they press too hard for tariff concessions at the last minute in the negotiations, particularly if Mr. Trump doesn’t think he is getting enough Chinese trade concessions in the phase-one deal. A phase-one deal still seems likely, but President Trump could still respond in anger by canceling the whole idea of a phase-one trade deal and returning to his original demand for a full trade deal including structural changes to the Chinese economy.
If there is a breakdown of a phase-one trade deal, then Mr. Trump can be expected to proceed with his Dec 15 tariff and his previous plan to raise the tariff to 30% from 25% on the original $250 billion of Chinese goods, if not impose new tariffs in addition.
The markets seem to already be convinced that there will be a phase-one trade deal within the next 2-3 weeks. However, the markets need to remain on guard for the outside possibility of the breakdown of the phase-one trade deal, which would produce major fall-out for the markets.
Washington is moving towards deferring the near-term government-shutdown threat — Congressional leaders are discussing another continuing resolution (CR) since they have made little headway on negotiations with the White House for funding the government for the remainder of the fiscal year. The border wall is again the main sticking point. If there is no new CR, there will be a U.S. government shutdown in just two weeks when the current CR expires on November 21. A White House official on Tuesday said that the White House would be open to a new CR lasting until December. The markets no longer get overly worried about a U.S. government shutdown, but would nevertheless prefer to avoid a shutdown on this go-around.
