The yield on the benchmark 10-year Treasury fell to a 20-month low on Tuesday as escalating trade tensions between the US and China and elevated concerns over a slowing global economy continued to drive interest in safe government bonds.

The yield on the 10-year note, which moves inversely to price, fell as much as 6 basis points to 2.26 per cent, the lowest level since September 26 2017. The yield on the 30-year dropped 5bp to 2.70 per cent, a 17-month low. The two-year yield moved 4bp lower to 2.12 per cent.

“The trade issue with China is having a pronounced effect on global growth and the market thinks the Fed needs to cut rates from here,” said Tom di Galoma, managing director at Seaport Global. “The economy is slowing and I don’t think this trade issue is going away anytime soon.”

Treasury prices have been rallying all through the month of May amid growing fears the deadlock in trade talks and the escalating tit-for-tat tariff battle will throw a spanner into US and Chinese economic growth.

The latest leg lower in bond yields come after President Donald Trump warned on Monday that US tariffs on goods from China could still easily go up substantially from current elevated levels.

Wrapping up a state visit to Japan, Mr Trump said: “As far as China is concerned, they want to make a deal. I think they probably wish they made the deal that they had on the table before they tried to renegotiate it . . . We’re not ready to make a deal. We’re taking in tens of billions of dollars in tariffs, and that number could go up very, very substantially, very easily.”

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The heated rhetoric has kept equities under pressure, although by lunchtime trading in New York the benchmark S&P 500 was marginally higher. Growth concerns were most readily reflected in the Treasury market. The 10-year bond yield has fallen by nearly 23bp since the start of the month, putting it on track for its biggest monthly drop since March.

Recent US economic data has been mixed. On Tuesday, The Conference Board said its consumer confidence index, a gauge of Americans’ willingness to spend, rose 4.9 points to 134.1 in May, beating market forecasts to reach its highest level since November. Last week, measures of durable goods orders and manufacturing activity were disappointing.

Morgan Stanley’s US equity strategists, led by Michael Wilson, said on Tuesday that weak economic data alone is causing concern and suggests growth will trend lower even if there is a resolution to the trade war.

“Recent data points suggest US earnings and economic risk is greater than most investors think,” they wrote in a note to clients. “Get ready for more potential growth disappointments even with a trade deal.”

Additional reporting by Peter Wells

Via Financial Times