Yields rise on trade optimism, volumes muted

By Karen Brettell

NEW YORK (Reuters) - U.S. Treasury yields edged higher on Friday on hopes the United States and China will take steps to de-escalate their trade war, though trading volumes were muted before a U.S. holiday.

The two countries gave signs on Thursday that they will resume trade talks as the two economic superpowers discussed the next round of in-person negotiations in September. A new round of U.S. tariffs on some Chinese goods is scheduled to take effect on Sunday.

Demand for Treasuries for month-end extension was seen capping bond weakness on Friday, though trading volumes were light ahead of Monday’s U.S. Labor Day holiday, when the bond market will be closed.

“It’s a decent-size extension, but volumes are very, very light as to be expected ahead of the holiday,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.

Investors are likely to remain nervous about the impact of worsening U.S.-China trade relations as economic growth weakens globally, which should maintain demand for safe-haven debt.

"It definitely feels like there are buyers of safe havens around the globe," Lederer said.

The yield curve between 2-year and 10-year notes on Wednesday was the most inverted since 2007, at minus 6.50 basis points, a signal that a recession is likely in one to two years. The curve was last minus 0.30 basis point.

Thirty-year bond yields fell to record lows of 1.905% on Wednesday as investors sought safe-haven debt, but rose back to 1.992% on Friday.

Data on Friday showed that U.S. consumer spending increased solidly in July as households bought a range of goods and services, though the pace of growth in consumption is unlikely to be sustained amid tepid income gains.

The University of Michigan's sentiment index, meanwhile, posted its largest drop since December 2012 in August.

(Reporting by Karen Brettell; Editing by Leslie Adler)

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