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Treasuries Show Significant Turnaround After Seeing Initial Weakness

After initially moving to the downside, treasuries showed a significant turnaround over the course of the trading day on Monday.

Bond prices climbed off their worst levels of the day and firmly into positive territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 2.1 basis points to 2.992 percent after reaching a high of 3.041 percent.

With the downturn as the day progressed, the ten-year yield closed below 3 percent for the first time since mid-September.

Treasuries initially came under pressure in reaction to the highly anticipated meeting between President Donald Trump and Chinese President Xi Jinping over the weekend.

At the meeting, Trump and Xi agreed to a 90-day truce in the escalating trade war between the world's two largest economies as they work to reach a long-term trade deal.

A White House statement said Trump agreed not to raise the tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent on January 1st as planned.

In return, China agreed to purchase a "not yet agreed upon, but very substantial, amount" of agricultural, energy, industrial, and other product from the U.S.

The White House said the U.S. and China will use the next 90 days to attempt to reach an agreement on issues such as forced technology transfer, intellectual property protection, and non-tariff barriers.

If the two countries are not able to reach an agreement by the end of the time period, the 10 percent tariffs on Chinese goods will be raised to 25 percent.

In remarks to reporters aboard Air Force One, Trump called the agreement with Xi an "incredible deal," claiming it will have an "incredibly positive impact" on "every type of product."

Trump also said China will be "opening up" and "getting rid of tariffs," stating in a subsequent post on Twitter that China has agreed to reduce and remove tariffs on cars coming into the country from the U.S.

The subsequent rebound by treasuries may have reflected skepticism about whether the U.S. and China will be able to reach a long-term agreement.

Paul Ashworth, Chief U.S. Economist at Capital Economics, noted Trump ripped up an earlier trade deal with China negotiated by Commerce Secretary Wilbur Ross.

"We suspect that since he negotiated this deal himself, Trump will be much more reluctant to torpedo it when his own personal reputation is on the line," Ashworth said.

He added, "Nevertheless, his own administration includes plenty of China hawks who are pushing the protectionist agenda, so we suspect China will have to offer a little more than the minor concessions that South Korea, Mexico and Canada agreed to reach trade deals with the U.S."

On the U.S. economic front, the Institute for Supply Management released a report showing an unexpected acceleration in the pace of growth in manufacturing activity in the month of November.

The ISM said its purchasing managers index climbed to 59.3 in November after falling to 57.7 in October, with a reading above 50 indicating growth in manufacturing activity. Economists had expected the index to edge down to 57.5.

Meanwhile, a separate report from the Commerce Department showed construction spending unexpectedly edged lower in October.

Trading activity on Tuesday may be somewhat subdued, with a lack of major U.S. economic data likely to keep some traders on the sidelines.

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