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BOND REPORT : Treasury Yields Rise As Investors Look Past Weak China Data, Focus On Potential Stimulus

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09/09/2019 | 04:23pm EDT

By William Watts, MarketWatch , Joy Wiltermuth

All eyes later in the week on ECB meeting

Treasurys came under pressure Monday, pushing up yields, as investors looked past downbeat China data over the weekend to focus on stimulus prospects ahead of this week's European Central Bank meeting.

What are yields doing?

The yield on the 10-year Treasury note rose 8 basis points to 1.632%, its highest since August 13, while the 2-year yield increased 5.7 basis points at 1.585%, it's highest since August 22. The yield on the 30-year Treasury bond gained 8.8 basis points at 2.109%, its highest yield since August 13. Yields and debt prices move in opposite directions.

What's driving the market?

China over the weekend said its global exports fell 3% to $214.8 billion, while imports rose 1.7% to $180 billion. For the first eight months of 2019, exports were off 1% from a year earlier and imports were down 5.6%.

The European Central Bank is widely expected to cut interest rates when policy makers meet Thursday, pushing its deposit rate further into negative territory, while possibly moving to restart a bond-buying program that it completed in December.

What are analysts saying?

The lack of a bullish response to downbeat trade data from China underlined prospects for further downside in Treasury prices -- and upside for yields, said Ian Lyngen, head of U.S. rates strategy at BMO, in a note.

"This is obviously a function of the never-ending trade war and the process of collecting evidence of the fallout has undoubtedly grown a bit long in the tooth, but as the impact on Beijing appears even more dire, the absence of market response is the highlight. We're open to the argument that investors are slipping back into the mode of 'bad is good again' as deteriorating economic prospects imply a great probability of monetary/fiscal stimulus," he wrote. "Regardless, the willingness to ignore a dismal Chinese trade update speaks to the strength of the technicals at this particular moment."

Looking to later this week, Tom di Galoma, a managing director at Seaport Global Holdings, said he expects ECB President Mario Draghi to go out with a "bang" and mandate a large QE program of asset purchases of up to EUR40 billion a month for the next year, before he hands over the reins of the central bank to Christine Lagarde.

"This should make European rates less positive or more negative as a result, pushing more international flows to U.S.-based fixed income," di Galoma wrote Monday in a client note.

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