Bond Report: Treasury yields sink as Pelosi’s Taiwan visit stokes U.S.-China tensions

Treasury prices jumped Tuesday, knocking down yields, as rising U.S.-China tensions over House Speaker Nancy Pelosi’s planned visit to Taiwan sparked demand for safe assets.

What yields are doing

The 2-year Treasury note yield

fell to 2.855%, down from 2.909% at 3 p.m. Eastern on Monday.

The yield on the 10-year Treasury note

was 2.556%, compared with 2.605% Monday afternoon.

The 30-year Treasury bond yield

yielded 2.888% versus 2.924% late Monday.

What’s driving the market

Global equities fell, with U.S. stock-index futures pointing to a lower start, with local news reports indicating Pelosi was set to arrive in Taiwan on Tuesday. China, which views the island as part of its territory, has threatened “serious consequences” if Pelosi’s visit goes ahead as planned.

Read: Pelosi leaves Malaysia, tensions rise over Taiwan visit

The White House on Monday criticized Beijing’s response, saying the U.S. “will not take the bait or engage in saber-rattling” and has no interest in increasing tensions with China.

In U.S. economic data, The June Job Openings and Labor Turnover Survey, known as the Jolts report, is due at 10 a.m.

The Treasury Department late Monday said it expects to borrow $444 billion in privately held net marketable debt during the July-September 2022 quarter, assuming an end-of-September cash balance of $650 billion. The borrowing estimate is $262 billion higher than announced in May 2022, primarily due to changes to projections of fiscal activity and the estimated impact of Federal Reserve System Open Market Account, or SOMA, redemptions of $120 billion, the department said.

During the October-December 2022 quarter, Treasury said it expects to borrow $400 billion in privately held net marketable debt, assuming an end-of-December cash balance of $700 billion, including the impact of an estimated $139 billion in SOMA redemptions. Details of Treasury’s quarterly refinancing plan will be released Wednesday morning.

Economists at Jefferies expect the Treasury on Wednesday to announce a $98 billion package of $42 billion in 3-year notes
$35 billion of 10-year notes, and $21 billion in 30-year bonds.

What analysts say

“Pelosi’s visit to Taiwan remains the primary driver of the risk-off sentiment,” said Ian Lyngen and Ben Jeffery, strategists at BMO Capital Markets, in a Tuesday note.

“Given the potential implications for ongoing U.S./China tensions, it’s understandable that investors would be trading the visit from a defensive stance; although we’re skeptical that the event-risk is limited to this week,” they wrote. “While a near-term response from Beijing is certainly a possibility, it’s also reasonable to assume a delay as diplomatic avenues are further explored. In short, this week has seen an unanticipated increase in geopolitical tensions that will further contribute to the bullish underpinnings for the Treasury market.”

Meanwhile Monday’s Treasury announcement leaves Treasury room to trim nominal coupon auction sizes “one last time for the coming quarter, with a heavier emphasis place on cuts in the sizes of 20-year bond auctions,” said Thomas Simons, money-market economist at Jefferies, in a note.

“In addition, we view these projections as confirming our expectation that more financing is going to be drawing from the Treasury bill market, specifically the increase in borrowing expected for Q3. Recently, bill supply has been increasing by roughly $40 billion per week, and we expect that is going to continue for some time to come,” he wrote.

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