10-year Treasury rate hangs below 1.8% as traders watch China trade pact

U.S. Treasury yields slipped on Wednesday as investors harbor some doubts about a lasting resolution between the U.S. China, even as delegates from both superpowers are set to ink the first stage of a trade agreement later in the session.

On Tuesday, yields were pushed lower following disappointing readings on U.S. consumer inflation and small-business sentiment and investors will watch for additional data later Wednesday.

What are major indexes doing?

The yield on the 10-year U.S. Treasury note

TMUBMUSD10Y, -1.54%

 fell 2.1 basis points to 1.794%, while the 2-year Treasury yield

TMUBMUSD02Y, -0.78%

 edged 1.4 basis points lower to 1.564%.

The 30-year Treasury bond yield

TMUBMUSD30Y, -1.47%,

also known as the long bond, shed 2.2 basis points at 2.253%,

What’s driving the market?

China-U.S. trade relations were on the front of investors’ minds. The agreement, which will be signed at 11:30 a.m. Eastern Time, represents a detente in a trade war that has rattled global markets and businesses for nearly two years. However, questions about the details, including how Beijing and Washington will tackle issues including Chinese subsidies to domestic companies, and intellectual property theft via entities like Huawei Technologies.

Meanwhile, a measure of producer prices in the U.S. showed muted levels of inflation which is anathema to bonds because it can erode the debt’s fixed value. The producer-price index inched up 0.1% last month, the government said Wednesday. Economists polled by MarketWatch had predicted a 0.2% increase.

Wholesale inflation rose just 1.3% last year — half as much as it did in 2018. Inflation has tapered off since the summer and shows little sign of acceleration.

The PPI report comes after a reading on Tuesday of U.S. consumer prices rose 0.2% in December, with core prices stripping out volatile food and energy prices, increasing by a slight 0.1%, below the 0.2% expected.

Separately, on Wednesday, the New York Federal Reserve’s Empire State business conditions index rose 1.5 points to 4.8 in January, the regional Fed bank said Wednesday. Economists had expected a reading of 3.6, according to a survey by Econoday. Any reading above zero indicates improving conditions.

Looking ahead, an account of business conditions in the Fed’s regional districts, known as the Beige Book, is due at 2 p.m.

Elsewhere, economic growth in Germany slumped to a six-year low in 2019, underscoring the vulnerability of Europe’s export powerhouse to tensions in the global economy. Germany’s 10-year government debt was at negative 0.218%,

TMBMKDE-10Y, -26.62%

 compared with negative 0.167% a day ago.

In Italy, an offering of 30-year Italian debt was announced. The sale comes amid growing appetite for fresh bonds, market participants said. 10-year Italian debt

TMBMKIT-30Y, -1.14%

was yielding 2.42%, compared with 2.458% on Tuesday.

What do market participants say?

“News that the US will not be cutting more tariffs on Chinese exports (beyond halving the 15% tariff on [U.S. dollar] 120bn of goods, which represents a decline in US tariffs on Chinese exports from 21.0% to 19.3%, according to the Peterson Institute) before a phase-two agreement is reached might weigh on sentiment today and support bond markets until the details of the deal are disclosed,” wrote analysts at UniCredit in a daily research report.

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