US yields dip as risk sentiment worsens amid China trade setback

NEW YORK – US Treasury yields slipped on Friday as risk sentiment worsened on concerns of a rekindling trade war with China after President Donald Trump said the world’s second-largest economy violated an agreement with the country on tariffs and trade restrictions.

In afternoon trading, the benchmark yield 10-year Treasury note fell to a two-week low and was last down 1 basis point (bp) at 4.414%. On the month, the note yield rose 24 bps, on track for its largest monthly gain since December, as investors fretted about the impact of tariffs on inflation.

Trump said on Friday that he made a “fast deal” in mid-May with Chinese officials for both countries to back away from triple-digit tariffs for 90 days. But a US official told Reuters that it appears China was moving slowly on promises to issue export licenses for rare earths minerals.

The Trump administration is now readying other actions targeting China, White House deputy chief of staff for policy Stephen Miller said on Friday.

Data showing benign inflation in April, meanwhile, had marginal impact on the market, with a measure of underlying price pressures posting its smallest annual increase in four years. The Personal Consumption Expenditures Price index (PCE), the Federal Reserve’s preferred inflation gauge, rose 0.1% in April and stood at 2.1% annually.

Fed policymakers will likely stick to their wait-and-see stance following the PCE data, with traders continuing to bet that by September the Fed will begin cutting rates gradually, bringing the policy rate down to 3.75%-4.0% by year’s end.

The Chicago Purchasing Managers Index released on Friday, meanwhile, was significantly below market predictions, showing businesses are cautious due to the tariffs. The index came in at 40 for this month, lower than a forecast for a 45 reading.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, fell 2.9 bps to 3.906%. On the month, the yield rose 29 bps, on track for its largest monthly rise since October last year.

“We had this week data showing inflation under control and signs of economic weakness, and good Treasury auctions,” said Lou Brien, market strategist at DRW Trading in Chicago. It may have been enough to get yields down from their peaks, but markets are still under the effect of uncertainty.

“For the most part, markets are reacting to the lack of clarity on what the tariff outcome will be and their influence on inflation,” he said.

FISCAL SUSTAINABILITY

Higher yields have been the norm for the month amid concerns about fiscal sustainability both in the United States and other developed countries, with signs of reducing demand for longer-dated government securities.

Yields also rose during the month amid the discussion of the budget and tax cut legislation in Congress. US 30-year yields fell to a more than one-week trough and were last up slightly at 4.926%.

For the month, 30-year yields advanced 25 bps, the biggest monthly gain since December.

Some worry there is the prospect of a longer-term crisis. JPMorgan Chase CEO Jamie Dimon expressed concern about a potential “crack” in bond markets during remarks at the Reagan National Economic Forum.

“I just don’t know if it’s going to be a crisis in six months or six years, and I’m hoping that we change both the trajectory of the debt and the ability of market makers to make markets”, he said. After saying a crisis is coming, Dimon added: “Unfortunately, it may be that we need that to wake us up.”

Next week, markets are expected to focus on developments in the trade negotiations with China, as well as the odds of enforcing high tariffs. A US trade court on Wednesday blocked most of Trump’s tariffs from going into effect in a sweeping ruling that the president overstepped his authority. They were temporarily reinstated by a federal appeals court on Thursday, further muddling the economy’s outlook.

Labor market data will also be important, according to DRW’s Brien. So far, there was not a spike in layoffs, but businesses have been very cautious in hiring.

(Reporting by Tatiana Bautzer, Ateev Bhandari, and Kanchana Chakravarty in Bengalaru; Editing by Sophie Walker, Gertrude Chavez-Dreyfuss, and Alan Barona)