August 3, 2018 / 8:26 PM / a year ago

TREASURIES-Yields slide on rising U.S.-China trade tension

(Updates with market moves, adds analyst quote)

By Kate Duguid

NEW YORK, Aug 3 (Reuters) - The middle of U.S. yield curve fell faster than the short and long ends on Friday as China unveiled retaliatory tariffs on $60 billion of U.S.-made goods and the White House said President Donald Trump’s resolve was firm on China trade matters.

The five-, seven- and 10-year note yields all fell more than 3 basis points with the five- and seven-year yields both down 3.5 basis points from late Thursday. The benchmark 10-year note yield was last at 2.954 percent, down 3.2 basis points from Thursday and 6.2 basis points below the week’s high of 3.016 percent.

With low liquidity late on a Friday in August, yields were “heading into the weekend without any sense that Chinese trade issues are coming to a close,” according to Ellis Phifer, market strategist at Raymond James in Memphis, Tennessee.

China’s finance ministry on Friday announced retaliatory tariffs on $60 billion worth of U.S. goods ranging from liquefied natural gas to some aircraft, and warned of further measures, signaling that it will not back down in a protracted trade war with Washington.

The White House mirrored the sentiment, with Larry Kudlow, director of the National Economic Council, saying “they better not underestimate the president,” in an interview on Fox Business Network on Friday. “He is going to stand tough.”

The increased trade tensions drove investors to seek safety in the Treasury market, driving up prices and knocking yields.

Yields were little moved by the mixed U.S. payrolls data released early Friday which showed that job growth slowed more than expected in July as employment in the transportation and utilities sectors fell. A drop in the unemployment rate, however, suggested that labor market conditions continued to tighten.

“The numbers, all in all, were a big yawn,” said Phifer.

Treasury yields were also unmoved by the rise in German and French sovereign debt prices during the European session, as investors concerned about the Italian budget fled to safety. Even after Italian Prime Minister Giuseppe Conte said on Friday the government had fixed the framework of its 2019 budget, Italian investors concerned about Rome’s spending plans sold government bonds and the statistics bureau said the economy would keep slowing.

The two-year note yielded 2.649 percent, down 1.6 basis points from Thursday. The 30-year bond yield was 3.093 percent, down 2.8 basis points from Thursday’s close. (Reporting by Kate Duguid; Editing by Jonathan Oatis and Richard Chang)

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