As U.S. equities continue to be roiled by volatility, fixed-income investors have been digesting the latest geopolitical news concerning optimism in a U.S.-China trade deal, as well as Brexit, which sent benchmark Treasury yields mostly higher on Tuesday.
The 10-year note ticked higher to 2.872, while the longer end of the yield curve in the 30-year note ticked slightly lower to 3.121. Near the front end of the curve, the two-year note ticked up to 2.762 and the five-year note rose to 2.736.
Markets were lifted early Tuesday on renewed optimism that a permanent trade deal between the United States and China was progressing based on a Bloomberg report that China would slash the current 15 percent tariff on cars to 40 percent. Based on the report, the proposal to pare down the tariff would be reviewed by the Chinese Cabinet in the coming days, but it has yet to be finalized and is subject to change.
Nonetheless, the news was interpreted by the capital markets that talks between the two economic superpowers are progressing.
“It is important for the market to get positive headlines at this time,” said Quincy Krosby, chief market strategist at Prudential Financial. “This is sustainable if we don’t hear a contradiction. This has been part of the problem. The algorithms work instantaneously and if we get someone with an opposing view we could turn around.”
Delayed Brexit Vote
The British pound retreated on Monday as British Prime Minister Theresa May announced that the parliamentary vote to decide the fate of Britain’s Brexit decision to leave the European Union will be delayed. May cited a bevy of gloomy forecasts for the decision to delay the vote, saying that she listened “very carefully to what has been said in this chamber and out of it.”
With her premiership on the line as well as the stability of the government, May opted to “defer the vote originally scheduled for Tuesday and not proceed to divide the house at this time.”
Opposition to a Brexit deal point to trade difficulties, problems in attracting global talent and an increased cost of living as reasons to not back the proposition of Britain divorcing itself from the EU. A continuous point of contention in getting a Brexit deal done is the Irish backstop–an arrangement to ensure that Brexit, whether a deal is struck or otherwise, would not result in a hard border between Northern Ireland and the Republic of Ireland.
Short-Term Bond Sees Inflows
As investors digest the latest geopolitical musings, a continued flight to government debt has been in vogue as the risk-off sentiment permeates the minds of investors. However, one such corporate bond ETF of the short duration variety has been seeing inflows–SPDR Portfolio Short Term Corp Bond ETF (NYSEArca: SPSB).
SPSB seeks investment results that correlate with the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index, which is designed to measure the performance of the short term U.S. corporate bond market. SPSB focuses on investment-grade holdings with short durations to hedge against further short-term rate increases should the Federal Reserve continue with an aggressive rate-hiking policy through 2019.
“Corporate bond names were fairly quiet yesterday but we did see one standout block buyer of SPSB,” said Brian Gilman of ETF Sales & Trading at Virtu Financial.
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