U.S. Treasury yields bounced off their lows to end higher on Tuesday on expectations for a delay to tariffs on China, even as White House officials offering conflicting comments on the eventual outcome.

What are Treasurys’ doing?

The 10-year Treasury note yield TMUBMUSD10Y, +1.14%   was up 0.4 basis point to 1.833% while the 2-year note rate TMUBMUSD02Y, +2.26%  , sensitive to expectations for monetary policy, rose 2.5 basis points to 1.652%, its highest level since Nov. 8. The 30-year bond yield TMUBMUSD30Y, +0.47%  declined 0.9 basis point to 2.255%.

What’s driving Treasurys?

See: Get ready for QE4, says Credit Suisse analyst, as Fed fails to calm short-term markets

On the international trade front, The Wall Street Journal reported both Washington and Beijing are planning for a delay on import tariffs on Chinese goods due to kick in on Dec. 15, citing officials on both sides. The report also said a partial trade deal may not be reached within this year, as negotiators discuss terms around Trump’s demands for China to commit to significant purchases of U.S. agricultural produce.

But Larry Kudlow, chief economic adviser for the White House, said the December tariffs could still be implemented.

The earlier strength in bond-market action vanished on trade optimism. The modest Treasurys selloff helped draw appetite for the $24 billion of 10-year benchmark notes sold in the afternoon.

In addition, news reports indicate that the U.S. Democratic Party, which controls the House, and President Donald Trump were close to an agreement to vote on the revamped North American trade pact with Mexico and Canada agreed earlier.

The Federal Reserve kicked off its two-day meeting, which will conclude on Wednesday. Though the central bank is expected to keep monetary policy unchanged, the Fed’s forecasts for interest rates could indicate how members of its rate-setting group understand its “appropriate” policy stance.

What did market participants say?

“The market has come off the highs seen early due to positive trade headlines,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

“Virtually no one is expecting the Fed to change interest rates or even to adjust their policy statement much at all. Keen eyes will focus on the dot plot, but even with this, the number of those showing hikes in 2020 will likely be dismissed as irrelevant as the core members of the Fed seem to be set on a view of no changes next year, barring some crisis,” said John Vail, chief global strategist at Nikko Asset Management.

 

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