Treasury Yields Jump on China Proposal, Trump Will Make ‘Major” Announcement on Saturday

Investors banking on an early end to the trade dispute between the United States and China, sold U.S. Treasury instruments on Friday in anticipation of a stronger economy and the potential for a sooner-than-expected rate hike by the Federal Reserve. Treasury yields rose after Chinese officials offered to increase U.S. imports for six years. Investors felt this move was a positive step toward a resolution of the lingering trade spat between the world’s two largest economies.

On Friday, 2-year Treasury yields settled at 2.616 percent, up 0.052 percent. The benchmark 10-year Treasury settled at 2.788 percent, up 0.041 percent and the 30-year Treasury bond settled at 3.10 percent, up 0.024.

China Wants to Help Erase Trade Deficit

According to Bloomberg News, Chinese officials made the offer during negotiations in Beijing earlier in the month.  The report said China would increase its annual import of U.S. goods by a combined value of over $1 trillion. The news prompted money managers to sell Treasurys which drove up yields.

Earlier in the week, the Wall Street Journal reported that the U.S. could ease tariffs against China. According to the report, the suggestion came from Treasury Secretary Steven Mnuchin, but faced opposition from U.S. Trade Representative Robert Lighthizer.

Lighthizer’s opposition was not unexpected since he is seen as the hardliner in the Trump administration. Shortly after the report, a senior government official told CNBC that Mnuchin had not made any such recommendations.

Government Shutdown

Portfolio managers continued to monitor the government shutdown, which reached a record 28^th day on Friday with no end in sight. However, late Friday, President Donald Trump said he will make a “major” announcement on Saturday about the border and ongoing government shutdown.

According to CNBC, the president did not provide any further details on what he would discuss.

Fresh developments during the week included Trump cancelling his trip to the World Economic Forum in Davos, Switzerland, scheduled for next week. He also called off sending his delegation to the meeting, “out of consideration” of the 800,000 workers not receiving pay because of the shutdown.

The political rift between Trump and House Speaker Nancy Pelosi widened last week after the president postponed Pelosi’s overseas trip with other members of Congress to visit U.S. troops in Afghanistan. Trump said the trip would be rescheduled when the government shutdown ends.

Earlier in the week, Pelosi sent Trump a letter, urging him to either reschedule his upcoming State of the Union address to a joint session of Congress or deliver it in writing because of the shutdown.

So far there has been very little negative impact on the financial markets from the government shutdown. The Treasury and the Federal Reserve have been unaffected by the event so it’s been business as usual.