August 16, 2019 / 1:52 PM / 2 months ago

Yields rise from three-year lows on German fiscal stimulus hopes

NEW YORK (Reuters) - Benchmark U.S. Treasury yields rose on Friday on a report that Germany may be open to running a deficit to boost growth, while stronger stock markets also reduced demand for safe haven debt.

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., August 13, 2019. REUTERS/Eduardo Munoz

Government bond yields plunged this week on concerns about global growth, and the closely-watched U.S. yield curve between 2-year and 10-year notes inverted for the first time since 2007 on Wednesday, signaling that a U.S. recession is likely in one-to-two years.

As economic data worsens, central banks globally are expected to adopt increasingly dovish monetary policies to loosen financial conditions.

With much of the European government bond market offering negative yields, however, there is concern that central banks are out of ammunition and that governments will need to turn to fiscal stimulus to bolster their economies.

Treasury yields jumped after Der Spiegel magazine reported that Germany’s right-left coalition government would be prepared to ditch its balanced budget rule and take on new debt to counter a possible recession.

Benchmark 10-year notes US10YT=RR were last down 15/32 in price to yield 1.578%, up from a three-year low of 1.475% on Thursday.

Concerns about growth are expected to remain as the U.S.-China trade war shows no signs of resolution.

“The market is attempting to gauge the extent, duration and magnitude of the fallout from the trade war,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

The Federal Reserve last month cut interest rates for the first time in over a decade and said further cuts may not be needed.

The bond market, however, sees a rate decrease at the U.S. central bank’s September meeting as a sure thing, with the only question being the size of the cut.

Interest rate futures traders are pricing in a 74% chance of a 25-basis-point cut and a 26% chance of a 50-basis-point one, according to the CME Group’s FedWatch tool.

Fed Chairman Jerome Powell is due to speak at the Fed’s economic symposium in Jackson Hole, Wyoming, on Aug. 23. His comments will be closely evaluated for any indications that he has changed his stance on further rate cuts.

Plunging yields across the globe have also sent investors to longer-dated debt to capture returns. Thirty-year Treasury bond yields had fallen to a record low of 1.916% on Thursday. They were last 2.037%.

Editing by Nick Zieminski

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