Bond Prices Pare Gains But Remain Supported by Trade Concerns

US Treasury prices backed off the highest levels Friday with the 10-year taking the lead while the five-year tumbled late to claim the losing slot from the two-year. Recovering stocks, position-squaring into the weekend and slowed activity added drag late in the session. The reports of better manufacturing and consumer sentiment data were largely overshadowed by the back-and-forth between the US and China over trade and tariff concerns.

The worries over a trade war brought in early safety buying even though the US actions had been telegraphed for some time. Dallas Federal Reserve President Robert Kaplan summed up the situation by noting that trade was “an opportunity,” not a threat, according to Reuters.

The week was packed with event-risk from the early squeeze of Treasury three-, 10- and 30-year auctions, consumer and producer prices and the policy decisions and forward guidance out of the Federal Open Market Committee (FOMC) and European Central Bank (ECB). The FOMC and ECB generally followed the script with the Fed adding a fourth tightening to 2018 while the ECB plans no rate hikes through summer 2019 and to halt its asset purchase program in December.

The 30-year was settled near 3.05%, the lowest since June 1, against a 3.0588% high, 3.012% low, 3.066% close Thursday versus 3.082% Friday, June 8. The 10-year yield went out near 2.92% from a 2.9401% high, 2.8888% low, 2.946% close and 2.935% a week ago. The five-year yield settled near 2.80% versus a 2.8128% high, 2.7634% low, Thursday and 2.775% a week back. The two-year went out near 2.562% against a 2.5823% high, 2.5244% low, 2.574% close and 2.495% June 8.

The curve trade unwound some early flattening, but pushed to the tightest levels since 2007, with the two- and 10-year yield differential near 36 from 36.5 Thursday and 44 a week ago. The five- and 30-year yield spread was little-changed near 25 versus 30.7 June 8.

Lindsey M. Piegza, Stifel chief economist, wrote Friday that while the Fed “found justification to further remove accommodation amid perceived improved domestic growth and inflation, central bankers overseas continue to struggle to unwind economic support with increasingly uneven — and disappointing — economic activity.”

Piegza noted the Fed “appears steadfast in its desire to restock the tools in its proverbial Fed tool belt,” boosting rates “a more normal level, potentially at a more accelerated, albeit still ‘gradual,’ pace.” She added that while conditions are “far from robust,” continued growth and rising inflation “may be as good as it gets” and be “good enough” for further rate hikes. She worries, however, the Fed may be “overzealous” with a fourth rate hike resulting in “an inverted curve by year-end.”

Monday’s calendar starts slow in a week largely dominated by housing data and Fed speakers with the June National Association of Home Builders’ housing market index due at 10 am ET.

Treasury will offer details on Tuesday’s four-week bill auction at 11 am and sell $48 billion three- and $42 billion six-month bills at 11:30 am.

Atlanta Fed President Raphael Bostic speaks at 1 pm with a following Q&A. Outgoing San Francisco Fed head, and incoming New York chief, John Williams speaks at a financial services event at 4 pm.