August 23, 2019 / 7:00 PM / 4 months ago

TREASURIES-Yields fall U.S.-China trade war escalates

 (Updates prices)
    * China unveils tariffs, Trump vows response
    * Fed's Powell says will act to sustain expansion
    * U.S. rate cut in September seen as certain

    By Karen Brettell
    NEW YORK, Aug 23 (Reuters) - Benchmark U.S. Treasury yields
fell to their lowest levels in a week on Friday as an escalation
in the U.S.-China trade war raised concerns about an economic
downturn.
    China said on Friday it will impose an extra 5% tariff on
U.S. soybeans from Sept 1, and additional 10% duties on U.S.
wheat, corn and sorghum from Dec. 15, in Beijing's latest
retaliatory trade measures against Washington.             
    U.S. President Donald Trump said he would respond to the
tariffs later on Friday and that he was ordering U.S. companies
to look at ways to close their operations in China and make more
of their products in the United States instead.             
    “This is a clear sign of an escalation of a trade war,” said
Subadra Rajappa, head of U.S. rates strategy at Societe Generale
in New York.
    The trade war is weighing on business sentiment even as
investors are already worried about slowing international
growth.
    Trump’s comments come after Federal Reserve Chairman Jerome
Powell said that the U.S. central bank will “act as appropriate”
to keep the economic expansion on track, but noted rising risks.
            
    "He did talk about all the risks that have happened since
the July meeting, and that suggests that he is allowing the
markets to price in a September move," said Gennadiy Goldberg,
an interest rate strategist at TD Securities in New York.
    Minutes of the Fed’s July meeting released on Wednesday
showed that policymakers were divided on cutting rates in July,
and were united in wanting to avoid the appearance of being on
the path to further rate cuts.             
    But the bond market has priced in a far more bearish picture
of the economy since the Fed’s July meeting.
    The two-year, 10-year yield curve inverted last week for the
first time since 2007, a signal that a recession is likely in
one to two years. The curve has traded in and out of inversion
for the past three days.
    Interest rate futures traders are pricing in a 100% chance
of a rate cut at the Fed’s September meeting, up from 96% before
Powell's comments, according to the CME Group’s FedWatch tool.
    Benchmark 10-year notes            were last up 26/32 in
price to yield 1.522%, down from 1.610% late on Thursday.
    The two-year, 10-year yield curve                was last
inverted by 0.50 of a basis point. 

 (Editing by Bernadette Baum, Jonathan Oatis and David Gregorio)
  
 
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