October 29, 2018 / 7:36 PM / 16 days ago

TREASURIES-Yields dip as stocks dive, trade war heats up

(Recasts, adds analyst quote, updates yields)

By Kate Duguid

NEW YORK, Oct 29 (Reuters) - Yields on U.S. Treasury bonds fell modestly on Monday afternoon after stocks took a nosedive on a report that President Donald Trump was preparing more tariffs on imports from China.

U.S. equities have been rocked in October as companies have reported that tariffs, rising borrowing costs and a slowdown in China hurt earnings in the third quarter and are expected to do the same in the fourth.

The Dow Jones Industrial Average and the S&P 500 opened up at the bell, but ceded those gains by mid-afternoon as both indexes turned negative. Analysts suggested that investors were watching, if not yet piling into Treasury debt.

“We still seem to be focused on the stock market, which has just sunk into negative territory,” said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson.

“We’re still watching the trade situation - there’s been talk that we’re still planning on more tariffs if the meeting with President Xi doesn’t work out.”

The United States is preparing new tariffs worth $257 billion on Chinese imports if talks between Trump and President Xi Jinping fail to resolve the ongoing trade dispute, according to a report from Bloomberg News.

The 10-year note yield fell modestly on the news, last at 3.083 percent, up less than half a basis point from the open. The 30-year bond yield made similar moves, slightly up for the day at 3.324 percent. The short end of the curve had turned negative for the day, with the two-year note at 2.814 percent, down less than half a basis point from the open.

Other safe-haven assets, such as the Japanese yen, the Swiss franc and the U.S. dollar also remained range-bound in spite of the sell-off in equities.

Investors may have been unwilling to make big moves in advance of the week’s heavy schedule of data releases. The ADP private payrolls report is due on Wednesday, the Markit PMI Manufacturing Index and the ISM Manufacturing Index on Thursday, and U.S. non-farm payrolls report on Friday.

Wages, which have been slow to grow despite a record low unemployment rate this year, are forecast to gain. Analysts at Jefferies projected a 0.2 percent month-on-month increase in average hourly earnings and a year-over-year increase of 3.2 percent. Year-on-year average hourly earnings have not risen by 3 percent or higher since April 2009.

The U.S. Treasury said on Monday it expects to borrow $15 billion less during the fourth quarter than previously estimated, issuing $425 billion through credit markets during the October-December period, assuming an end-December cash balance of $410 billion.

Reporting by Kate Duguid; Editing by Jeffrey Benkoe and Chizu Nomiyama

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