US yields climb as China trade, bank worries ebb

NEW YORK – US Treasury yields rose on Friday as concerns about rising trade tensions with China and the credit quality in regional banks waned, but the yield on the benchmark 10-year note was still poised for a third straight week of declines.

Yields have steadily retreated since last Friday, when US 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 by US officials criticising 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 said it would take a charge-off on two commercial and industrial loans. That 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 confirmed he would meet with Chinese President Xi Jinping in two weeks in South Korea despite raising doubts last week that the meeting would happen.

In addition, concerns over contagion among the regional banks eased after solid earnings from several names in the sector. The KBW regional bank index rallied more than 1%, taking pressure off the broader equities market.

Rob Haworth, senior investment strategist at US Bank Wealth Management in Seattle, said risk appetite had already diminished with the possibility that trade tensions between China and the US could escalate, and was dampened further as worries mounted over regional banks.

“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,” he said.

The yield on the US 10-year Treasury note was 2.3 basis points higher at 3.999% after hitting a 6-1/2 month low of 3.936% earlier in the session. It is down 5 basis points on the week and nearly 19 basis points during its three-week decline.

The yield on the 30-year bond gained 1.6 basis points to 4.599%.

Yields have also been moving lower as recent comments from Fed officials have cemented expectations for a rate cut by the central bank at its upcoming policy meeting at the end of the month.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 3.1 basis points at 3.457% after earlier falling to 3.376%, its lowest since August 26, 2022. But the yield was down more than 6 basis points on the week and on pace for a third straight weekly fall.

Federal Reserve Bank of St. Louis President Alberto Musalem suggested Friday he will support a central bank interest rate cut at the end of the month, while warning it is important for the Fed not to go too far with easing the cost of credit amid still unsettled inflation risks.

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 US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 54 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.322% after closing at 2.318% on Thursday, its lowest since June 30.

The 10-year TIPS breakeven rate was last at 2.273%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Kirsten Donovan and Edmund Klamann)