By Sam Goldfarb 

U.S. government bonds extended recent gains Wednesday after new concerns arose about the prospects for a U.S.-China trade agreement.

The yield on the benchmark 10-year U.S. Treasury note fell to 1.737% from 1.785% Tuesday, marking its sixth decline out of the past seven trading sessions.

Yields, which fall when bond prices rise, slid overnight after the Senate passed legislation late Tuesday aimed at stemming what senators said was the erosion of democratic freedoms in Hong Kong.

Though not directly tied to U.S.-China trade talks, some analysts said the legislation could exacerbate tensions between the two countries, making a trade deal more difficult. Passage of the bill also came as investors' optimism about a deal was already receding based on news reports describing friction between the two sides over issues such as China's demand for removing tariffs and resistance to buying a specific amount of U.S. farm products.

A Reuters report that the first phase of a trade deal between the U.S. and China may not happen by year-end caused yields to drop further on Wednesday afternoon, while stocks also fell near session lows.

Concerns about trade have boosted Treasurys over the past week, a reversal of the selling that took place over the previous month when investors were more confident about a trade deal.

Investors often buy Treasurys during times of political and economic uncertainty because the bonds offer steady interest payments with essentially no risk of default. Demand for that safety has pulled the yield on the 10-year note down from its recent peak of 1.930% on Nov. 8. The yield, though, remains comfortably above its 52-week closing low of 1.456% reached in early September.

There has been a divergence in how different types of Treasurys have performed in recent sessions.

While yields on longer-term bonds have fallen materially, short-term yields, which are particularly sensitive to changes in monetary policy, have barely budged. That indicates that downbeat trade headlines haven't yet led investors to count on further interest-rate cuts by the Federal Reserve.

As they were poised last month to cut interest rates for the third time this year, most Fed officials thought that would be enough to support the economy barring a change in the outlook, according to minutes from the Oct. 29-30 meeting released Wednesday.

Although the gap between long-term and short-term yields could continue to shrink, some investors and analysts think it could be difficult for long-term yields to fall much further if there is no change in interest-rate expectations.

"You probably need the front end to participate in order to move further to lower yields," said Daniel Mulholland, head of U.S. Treasury trading at Crédit Agricole.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

November 20, 2019 17:04 ET (22:04 GMT)

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