US yields climb as trade deal hopes outweigh data

Yields fall after jobless claims, productivity data

Trump-Xi phone talks boost market sentiment

Two-year yield tests 50-day moving average

(Updates to afternoon US trading)

NEW YORK, June 5 (Reuters) – U.S. Treasury yields rebounded on Thursday from an initial drop in choppy trading after a round of economic data was overshadowed by optimism that U.S.-China trade tensions could be easing.

Yields had extended declines after the Labor Department said weekly initial jobless claims rose by 8,000, climbing for a second straight week, to a seasonally adjusted 247,000 versus the 235,000 estimate of economists polled by Reuters.

The Labor Department reported that first-quarter worker productivity dropped faster than initially thought, which sent labor costs sharply higher as businesses are grappling with higher costs due to U.S. President Donald Trump’s tariffs on imported goods.

Yields pared declines after Trump and Chinese President Xi Jinping held a rare leader-to-leader call that left key issues to further talks, with Trump later saying “we’re in very good shape with China and the trade deal.”

“The fact that Trump and Xi had a phone call that’s probably constructive and the market’s reacting to that,” said Bill Merz, head of capital markets research at U.S. Bank Asset Management in Minneapolis.

“But to pretend that anyone has an edge in tariff negotiation speculation or anticipating how it unfolds when really there’s probably three or four people on the planet that have true insight on that, the rest is speculation and conjecture.”

The benchmark U.S. 10-year Treasury note yield rose 3 basis points to 4.395% after dropping to 4.318%, its lowest since May 8.

Trump also held a meeting with German Chancellor Friedrich Merz that lacked any of the combativeness that has been part of other White House meetings with foreign leaders.

Markets have been volatile since Trump announced a flurry of tariffs on a long list of countries on April 2, only to pause some levies, increase others and declare new ones.

Commerce Department data on Thursday showed the U.S. trade deficit narrowed sharply in April, with imports decreasing by the most on record as the front-running of goods ahead of tariffs faded.

The 30-year bond yield edged down 0.3 basis point to 4.857%.

Federal Reserve officials have recently indicated a patient approach to determining the effect tariffs may be having on prices, although they have also indicated rate cuts may still be possible this year.

Fed Governor Adriana Kugler said she supports keeping short-term U.S. borrowing costs at their current “moderately restrictive” level as long as tariffs continue to threaten to lift inflation.

Kansas City Federal Reserve Bank President Jeff

those tariff concerns, saying upward price pressure could be apparent in coming months but not fully known for much longer.

Philadelphia Federal Reserve President Patrick

called for caution, saying the current outlook for the economy is too unsettled to say where monetary policy is headed.

A closely watched part of the U.S. 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 46.7 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, advanced 4.9 basis points to 3.926% after dipping to 3.833%, its lowest since May 8.

Adam Turnquist, chief technical strategist at LPL Financial in Charlotte, North Carolina, said in a note that the two-year yield has been retesting its support near the 50-day moving average, currently at 3.8714%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.332% after ending at 2.335% on Wednesday, its lowest close since May 7.

The 10-year TIPS breakeven rate was last at 2.298%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Sharon Singleton and Richard Chang)