Investors snap up haven assets as US-China tensions intensify

Government bonds rallied on Tuesday as investors bought up the haven assets in a reaction to increasing US-China tensions and deepening concern about the spread of Covid-19.

The yield on the 10-year US Treasury, the benchmark for global debt markets, fell as much as 0.05 percentage points to 1.534 per cent, its lowest since early March. Bond yields move inversely to prices.

Germany’s equivalent Bund yield slipped by as much as 0.02 percentage points to minus 0.222 per cent, its lowest in about a month.

The moves came after US president Joe Biden launched a task force to boost the resilience of supply chains and moved to examine new tariffs on the Chinese rare earth magnets that are used in goods including electric vehicles and smartphones.

Meanwhile, the UK announced a “strengthened package of support” to combat a rise of the Delta variant of coronavirus in northern England. Companies and analysts also told the Financial Times that the spread of the virus in Taiwan was threatening its exports of computer chips.

“I think a lot of investors initially expected Biden to take a more conciliatory stance towards China than [former president] Trump, but he is taking quite a tough position,” said Catherine Doyle, investment specialist at Newton Investment Management. “You’ve also got worries building up about the [new coronavirus] variants.”

Line chart of US 10-year government bond yield (%) showing Treasuries rally on US-China tension worries

US and European equities drifted on Tuesday, as traders held back from making fresh bets because of what David Moss, co-head of global equities at BMO Global Asset Management, described as “a sense that the good news has all come out.”

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Wall Street’s blue-chip S&P 500 index traded flat, just below its all-time high achieved in early May. The Europe Stoxx 600 added 0.2 per cent, building on its record high reached on Monday.

“We had the big collapse in markets last year,” when the pandemic swept into US and Europe, said Moss, “and the big recovery, with Europe having caught up with the US, strong momentum in developed economies and strong pent-up consumer demand.”

“But we know all this now, so where do we go from here?”

Bond prices rose despite jitters over rising US inflation, which erodes the returns from fixed interest securities such as Treasuries.

Data released on Thursday is expected to show that US consumer prices, excluding volatile food and energy costs, rose 3.4 per cent in May over the same month last year. This would represent the strongest year-on-year price increase since 1993, although Federal Reserve chair Jay Powell has maintained for months that bursts of inflation will be a temporary effect of industries reopening after pandemic-enforced shutdowns.

“Investor concern over the US inflation issue has become much less acute,” said Deutsche Bank strategist Jim Reid, after global bond yields climbed sharply in the first three months of this year.

In currencies on Tuesday, sterling declined 0.2 per cent against the dollar to $1.4148 as concerns mounted that rising coronavirus cases would push back the UK government’s June 21 deadline for easing lockdown curbs in England.

The euro was steady at $1.218. The dollar index, which measures the greenback against trading partners’ currencies, gained 0.2 per cent.

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Brent crude, the international oil benchmark, was up 0.6 per cent at $71.89 a barrel.



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