TREASURIES-US yields rise as China trade, bank worries ease

Benchmark 10-year note yield declines for third week Trump says tariff proposal on China unsustainable Fears over regional bank contagion wanes By Chuck Mikolajczak NEW YORK, Oct 17 (Reuters) - U.S. Treasury yields climbed on Friday, as concerns about rising trade tensions with China and worries about the credit quality in regional banks ebbed, but the benchmark 10-year note yield was still on track for a third straight week of declines. Yields have moved sharply lower since last Friday, when U.S. President Donald Trump threatened to raise tariffs on Chinese goods to triple digits, followed this week by both countries charging additional port fees on ocean shipping firms and criticism by U.S. officials of China’s expanded rare earth export controls. On Thursday, additional concerns regarding regional banks and the credit market further dented risk appetite after Zions Bancorporation (ZION.O) said it would take a charge-off on two commercial and industrial loans, which came on the heels of bankruptcies by auto parts maker First Brands and subprime lender Tricolor. But fears over trade tensions appeared to be allayed somewhat after Trump said his proposed tariff on goods from China would not be sustainable and also confirmed he would meet with Chinese President Xi Jinping in two weeks in South Korea after raising doubts last week that it would happen. In addition, concerns over contagion among the regional banks eased after solid earnings from several names in the sector, and the KBW regional bank index (.KRX) rallied more than 1%. “What started kind of the risk fears is concerns that U.S.-China trade relations could continue to get much, much worse and now the market is finding reasons to compound it,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle. “The market is walking some of that back and trying to evaluate how serious this credit fear may really be - is it a one-off? Is it more persistent? And so I think the market’s evaluating that along with the China issue, and we’ve got another couple of weeks of that.” The yield on the U.S. 10-year Treasury note (US10YT=TWEB) was 3.3 basis points higher at 4.009% after hitting a 6-1⁄2 month low of 3.936% earlier in the session, but is down 4.2 basis points on the week and nearly 18 basis points during its three-week decline. The yield on the 30-year bond (US30YT=TWEB) rose 2.8 basis points to 4.611%. Yields have also been moving lower as recent comments from Fed officials have cemented expectations for a rate cut from the central bank at its upcoming policy meeting at the end of the month. The two-year (US2YT=TWEB) U.S. Treasury yield, which typically moves in step with interest rate expectations, was 3.1 basis points higher at 3.457% after earlier falling to 3.376%, its lowest since August 26, 2022. But the yield was down nearly 6 basis points on the week and also on pace for a third straight weekly fall. Markets have fully priced in a rate cut of at least 25 basis points at the Fed’s October meeting and a 1% chance for an outsized 50 basis point cut, according to CME’s FedWatch Tool. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes (US2US10=TWEB) , seen as an indicator of economic expectations, was at a positive 55.0 basis points. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) (US5YTIP=TWEB) was last at 2.340% after closing at 2.318% on Thursday, its lowest since June 30. The 10-year TIPS breakeven rate (US10YTIP=TWEB) was last at 2.285%, indicating the market sees inflation averaging about 2.3% a year for the next decade.