By Sunny Oh

China to impose tariffs on U.S. imports of agricultural products, cars, oil and other goods

U.S. Treasury yields fell sharply on Friday after China announced more tariffs on imports of U.S. goods, Federal Reserve chair Powell indicated that lower interest rates were possible, and President Trump "ordered" American companies home, creating even more uncertainty for business planning.

Longer term yields also fell faster than short term yields, inverting the yield curve again.

What are Treasurys doing?

The 10-year Treasury note yield fell 9 basis points to 1.523%, its lowest close since August 2016, contributing to a weekly decline of 1.7 basis points.

The 2-year note rate slumped 7.8 basis points to 1.528%, paring its week long rise to 4.9 basis points. The 30-year bond yield plunged 8.8 basis points to 2.018%, trimming its weekly rise to 1.7 basis points. Bond prices move in the opposite direction of yields.

The 2-year note yield closed above the 10-year note yield for the first time since 2007, inverting the so-called yield curve. A lasting inversion of the yield curve can serve as a recession indicator. A recession followed after the last seven inversions of the 2-year/10-year spread.

Opinion: The Fed should heed the bond market and slash interest rates (http://www.marketwatch.com/story/the-fed-should-heed-the-bond-market-and-slash-interest-rates-2019-08-22)

What's driving Treasurys?

Government bonds rallied and stocks slumped after China's finance ministry on Friday (http://www.marketwatch.com/story/china-announces-tariffs-on-75-billion-of-us-goods-2019-08-23)said it would impose tariffs on $75 billion of U.S. goods, staggered over two stages. The first batch of tariffs would kick in at Sep. 1, with the second batch coming in at Dec. 15.

Federal Reserve chair Powell in a planned speech said the U.S. central bank would "act as appropriate", and that he was aware of the downside risks to the U.S. economy including slower global economic growth and trade policy tensions. He, however, held back from promising outright to lower interest rates.

Still, traders on the fed fund futures market all but expect a rate cut at the Fed's September meeting, according to CME Group data.

President Donald Trump fired back in tweets describing Powell and Chinese President Xi Jinping as enemies, and "ordered" U.S. companies to start moving their supply chains out of China.

The S&P 500 and the Dow Jones Industrial Average sank on Friday, putting key equity benchmarks on track for losses this week.

See: Powell says Fed 'carefully watching developments' and 'will act as appropriate' (http://www.marketwatch.com/story/powell-says-fed-carefully-watching-developments-and-will-act-as-appropriate-2019-08-23-10103027)

Earlier this week, several members of the Federal Open Market Committee including Kansas City Fed President Esther George expressed their opposition to further interest rate cuts. They felt slowing but still healthy economic conditions did not necessitate easier monetary policy.

On the side of the monetary policy doves, St. Louis Fed President James Bullard (http://www.marketwatch.com/story/feds-bullard-backs-more-interest-rate-cuts-2019-08-23)said he would support more interest rate cuts to serve as insurance against growth risks from a contracting manufacturing sectors.

What did market participants' say?

"Post Powell comments this morning, the rates market's feeling is that a 25 basis point rate cut for September is completely baked in. The market has gained more comfort on that," Gary Cameron, portfolio manager at Garda Capital Partners, told MarketWatch.

"As regards to the China tariff story, it doesn't look like there's any resolution coming any time soon on the trade front," said Cameron.

(END) Dow Jones Newswires

August 23, 2019 16:01 ET (20:01 GMT)