Long-dated notes gain on trade war, Europe concerns

By Karen Brettell

NEW YORK (Reuters) – The U.S. Treasury yield curve flattened to its lowest level in over 10 years on Monday as concerns about trade wars and divisions within the euro zone boosted demand for longer-dated safe-haven debt.

Trade fears and tensions in Europe have raised concerns that divisions could slow global growth and potentially impede the Federal Reserve from making further interest rate hikes.

Fed Chair Jerome Powell “sees the economy as strong, his outlook is also strong because he envisions the tax cut helping out the economy for the next year or two,” said Lou Brien, a market strategist at DRW Trading in Chicago.

“However, the trade issue is something that he has not factored in because there’s nothing in the data,” Brien added.

Fed policymakers earlier this month said two additional rate hikes are expected by the end of this year, compared with one previously.

Trade war fears were stoked by reports that the Treasury was drafting curbs that would block firms with at least 25 percent Chinese ownership from buying U.S. companies with “industrially significant technology.”

U.S. Treasury Secretary Steven Mnuchin said on Monday that forthcoming investment restrictions from the Treasury will not be specific to China but would apply “to all countries that are trying to steal our technology.”

“Trade wars typically have a negative impact on the markets. Markets don’t like uncertainty,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.

Benchmark U.S. 10-year notes () gained 5/32 in price to yield 2.884 percent, down from 2.900 percent late on Friday. The yield curve between 2-year and 10-year notes flattened to 33 basis points, the lowest level since 2007.

Italian bonds also sold off on Monday and safe-haven German Bunds were in demand as a debate over migration threatened to widen divisions within the euro zone and undermine German Chancellor Angela Merkel’s authority.

While the migration issue itself is not a primary concern for markets, the effect it could have on euro zone integration and the potentially damaging rift it has provoked within the government in Berlin are worrying investors, analysts said.

The U.S. Treasury will sell $100 billion in new coupon-bearing supply this week, including $34 billion in two-year notes on Tuesday, $36 billion in five-year notes on Wednesday and $30 billion in seven-year notes on Thursday.

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