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China, Canada Officials Shake up Bond Markets

Volatility in US Treasury prices continued during today’s trading session, further fueled by a report out of China which referenced a recommendation from officials to cut back on UST purchases.  The anonymous Chinese officials were report to hold the view that Treasurys were beginning to become a less attractive asset, especially given the recent increase in trade tensions between the US and China.  Current UST holdings by China are close to $1.2 trillion, the most of any foreign nation.  Bill Gross was also quoted as saying that a bear market in the US bond market is now likely underway, albeit he did not foresee drastic increases in bond rates in the near term.

 

 

Treasury yields/swap rates climbed as much as 4bps across the curve, with the 10yr yield touching close to 2.60%, before settling back to near unchanged for the session.  Much of the rebound in Treasury prices this afternoon was attributed to news out of Canada, where two officials stated their expectation that President Trump would have the United States withdraw from NAFTA.  Up until this point in time, there has been very little common ground between the current US administration and Canada or Mexico, leaving little room for optimism that successful negotiations would occur before the designated March deadline.

 

 

Weighed down by the United States’ potential withdrawal from the decades-old trade agreement, US stocks experienced their first losing day of 2018, as all three major US stock indices declined roughly 0.1%.  Shares in utilities and real-estate experienced the biggest losses, while bank stocks continued to rise with investors considering the possible end to the 30-year bull bond market as a positive for bank earnings.  In commodities, gold futures gained 0.4% on the day with the rise in geopolitical tensions.  Crude oil continued its demand-driven rally, as WTI crude finished 0.8% higher on the day to $63.50/barrel – a new 3 year high.

 

 

Import Price Acceleration Cools

Headlining a light day for new economic data releases, US import prices edged 0.1% higher last month, missing expectations of a 0.4% gain and falling sharply from November’s +0.8% level.  Much of the deceleration was attributed to imported petroleum, where prices rose 2% in December down from an 8% increase in the prior month.  Further detail on inflation will be provided on Friday morning with the Labor Department’s release of its consumer price index, where a 0.1% rise in headline CPI is expected.  A separate report this morning displayed US business inventories growing at their largest clip of 2017 during November at +0.8%.  The Commerce Department reported the fastest build up in the motor vehicle (+0.7%) and wholesale (+1.5%) sectors.

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