Bond Report: 10-year Treasury yield lowest in three months as U.S.-China tensions spurs bond rally

U.S. Treasury yields fell Wednesday after the U.S. ordered China to close its consulate in Houston, exacerbating tensions between the two world’s largest economies.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, 0.595% was down 1.1 basis points to 0.595%, its lowest since April 24, while the 2-year note rate TMUBMUSD02Y, 0.161% was at 0.145%. The 30-year bond yield TMUBMUSD30Y, 1.294% slipped 2.3 basis points to 1.290%, its lowest since May 1. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

A resurfacing of geopolitical concerns rattled markets on Wednesday, buoying prices for haven assets like government bonds. The U.S. State Department told China to close its consulate in Houston “to protect American intellectual property” and Americans’s private information. The Chinese Foreign Ministry spokesperson said this represented an “unprecedented escalation,” and pledged to retaliate if the U.S. continued to take the “wrong path.”

See: China says its Consulate General in Houston has been ordered shut

In economic data, U.S. existing home sales in June slid 9.7% in May as the coronavirus pandemic continued to weigh on the U.S. real-estate market.

On the coronavirus front, the U.S. counted more than 65,000 new infections, and more than 1,000 deaths, bumping the death toll to 142,080, according to data aggregated by Johns Hopkins University. Texas and Florida reported a record increase in average daily new deaths, raising worries the economic recovery in the two large regional economies will stall if the disease does not come under control.

The U.S. Treasury auctioned $17 billion of 20-year bonds Wednesday afternoon. The influx of supply didn’t weigh on trading for long-dated government paper, reflecting how the rapid increase in new issuance due to increased fiscal spending hasn’t deterred appetite for Treasurys.

What did market participants’ say?

“Geopolitical risk tends to hang out there like a shadowy character in a movie, just waiting to make its appearance. But, there may be something bigger actually ‘hanging in the shadows,’ and this could be the reason why yields are falling,” said Kevin Giddis, chief fixed-income strategist at Raymond James.

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