Treasuries Pare Declines Spurred by China Policy Assurance

  • Rebound accelerated as dollar-yen rate slumped to lows
  • Yields remain inside their weekly and monthly ranges

Treasuries fell Friday after the Trump administration’s affirmation of the One-China policy curbed demand for haven assets globally.

Yields were higher by 1-2 basis points at 3:20 p.m. in New York, with the 10-year yielding 2.41 percent. Most European 10-year yields rose 3-7 basis points. U.S. yields retreated from session highs concurrently with the dollar-yen rate, with which they’ve been highly correlated recently.

  • Yields fell sharply to lowest levels of U.S. trading following a downdraft in USD/JPY rate, a proxy for risk appetite; as 10Y yield climbed from 1.80% on Election Day to 2.60% on Dec. 15, USD/JPY rate climbed from 105 to nearly 119; neither has exceeded those levels since
  • TIPS breakeven inflation rates, which climbed as oil rose nearly 2% and gasoline futures traded at highest level since mid-January, retreated with nominal yields
  • Curve flattened as yields retreated from highs, narrowing 5s30s spread for fourth straight day, to 112.5bp, lowest since Jan. 27; flattening was supported by expectations Fed’s Yellen, slated to address Congress next week on economy and monetary policy, might seek to lift market-implied odds of a March rate increase toward even
  • On the week, yields were slightly lower -- 5Y by 2.5bp -- as demand for haven assets, driven by fading expectations for near-term fiscal stimulus and French election risk, was offset by Trump’s Thursday pledge of action on taxes within weeks, as well as supply pressure from Treasury auctions
  • Technical analysis supports lower yields, BofA strategist Paul Ciana said; in futures, FV and TY contracts broke resistance levels this week, and cash 5Y yield formed a top; MORE 
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