By Daniel Kruger

U.S. government bond prices edged higher Monday with investors concerned about political instability in Germany and the potential for rising trade tensions to drag on global economic growth.

The yield on the benchmark 10-year Treasury note fell to 2.921%, according to Tradeweb, from 2.926% Friday. The two-year note yield, which tends to move with expectations for Federal Reserve interest-rate policy, fell to 2.553% from 2.557%. Yields fall as bond prices rise.

Yields fell after German Chancellor Angela Merkel was handed a two-week ultimatum by her coalition partners, adding the country to the list of areas in the world with the potential to add instability to a turbulent geopolitical environment.

Ms. Merkel was handed a two-week ultimatum by her coalition partners to secure a deal on migrants with the country's European neighbors, a move that buys the German leader time to settle a crisis threatening to topple her government.

Yields also fell as investors weighed the ramifications of the Trump administration's plans to move ahead with 25% tariffs on $50 billion in Chinese goods. Beijing said in response to the U.S. move Friday that it would retaliate in "equal scale and equal strength."

"Tariffs are certainly negative for equities and negative for the economy," said Andrew Brenner, head of global fixed-income at NatAlliance Securities "There's more nervousness about where the economy is going."

The gap between yields on U.S. Treasury debt maturing in two- and 10-years, also known as the yield curve, flattened to 0.37 percentage point, the smallest since August 2007. Investors and economists look to the measure as a guide for the direction of the economy, with steeper yield curves signaling stronger growth. Two-year yields have risen above 10-year yields in each U.S. recession since at least 1975.

Fed funds futures, which investors use to bet on the path of Federal Reserve monetary policy, show a 58% probability that officials will raise interest-rates a total of four times this year, up from 43% a week ago, according to data from CME Group.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

June 18, 2018 12:25 ET (16:25 GMT)

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