(Bloomberg) — A rally in Treasuries driven by concerns around US regional bank credit exposures and resurgent trade tensions stalled as lender shares stabilized and comments on China by US President Donald Trump steadied the broader stock market.
Benchmark yields were higher by as much as three basis points after erasing declines. The reversal tracked an early rebound in US stocks after Fox Business televised part of an interview with Trump in which he said the high tariffs he has threatened to impose on China aren’t sustainable.
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Reinforcing investment risk appetite, several economists said state-level data suggest that new claims for unemployment insurance benefits declined last week, a sign of labor-market strength. National data remain held up by the US government shutdown that began Oct. 1.
“The market’s pricing for growth expectations has continued to slip despite the absence of key data,” interest-rate strategists including Gennadiy Goldberg and Jan Nevruzi at TD Securities said in a report. “We refrain from chasing the move lower as we believe underlying economic data has not deteriorated sharply.”
The 10-year note’s yield fell back below 4% this week, prompting US rates strategists at JPMorgan Chase & Co. to scrap their tactical recommendation to be short, because of “the risk of a follow-through to lower yields.” A surge in open-interest in bullish options on 10-year notes has underscored that risk.
Earlier Friday, yields declined to the lowest levels in months, extending steep declines Thursday after two US regional banks disclosed problem loans, prompting investors globally to seek havens. Shares of those banks rebounded in trading Friday, further eroding haven demand.
European and UK government bonds took direction from Treasuries. German 10-year yields dropped as much as five basis points to 2.52%, the lowest level since June. Meanwhile, UK two- and 10-year yields fell as much as five basis points to 3.80% and 4.45% respectively.
The setback for US regional banks helped cement expectations for two more quarter-point interest rate cuts by the Federal Reserve this year, which had mounted over recent weeks as the US government shutdown threatened to further weaken the nation’s job market.
