October 11, 2019 / 2:45 PM / 2 months ago

TREASURIES-Yields follow stocks higher on China trade, Brexit relief

NEW YORK, Oct 11 (Reuters) - U.S. Treasury yields were higher on Friday morning in step with the equity market as hopes rose for amicable resolutions to the U.S.-China trade war and Britain’s exit from the European Union.

Treasury debt is a safe-haven asset into which investors move in moments of political and economic instability. Money on Friday flowed out of Treasuries and into riskier assets like stocks, with the S&P 500 up 0.85% at the open, and the Dow up 0.75%.

The trade war with China, now in its 15th month, has begun to depress U.S. economic growth, raising the chances of a Federal Reserve interest rate cut in October. Those expectations fell on Friday morning.

“The Fed eased the last couple of meetings because of the implications of global developments, by which they meant the trade war and Brexit in particular. As you get optimistic on those things, you’re getting a little pullback on Treasuries because maybe the economy will work a little bit better once those things are solved,” said Lou Brien, market strategist at DRW Trading.

A Chinese state newspaper said on Friday that a “partial” trade deal would benefit both countries and that Washington should take the deal on offer, reflecting Beijing’s aim of cooling the row before more U.S. tariffs kick in.

Also on Friday, the European Union’s Brexit negotiator Michel Barnier told member states that Britain had adjusted its position on customs on the British-Irish border, a key sticking point in the talks.

The two-year Treasury yield, which is a proxy for market expectations of moves in Fed interest rate policy, rose 8.8 basis points to 1.618%. The benchmark 10-year yield was up 9.4 basis points to 1.750%.

Forecasts that the Fed would cut interest rates at its October meeting were at 66.8%, down from 82.3% on Thursday, according to CME Group’s FedWatch tool.

“Certainly, it is decreasing the likelihood of (a Fed rate cut in October) in the minds of market participants,” said Brien.

“I think there’s a pretty good chance that they go anyway. The minutes from the last meeting were notably more downbeat on the economy than the previous meetings’ minutes,” he said.

“They also noted that they still have a good baseline outlook for the economy, but they were able to maintain that outlook only because they had eased. In other words, the Fed is running faster to stay in the same place.”

Reporting by Kate Duguid Editing by Nick Zieminski

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