Bond Report: Global bond markets come under pressure as hopes for U.S. – China trade deal unwind haven trades

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Global bond yields rose on Tuesday as hopes for a partial U.S – China trade deal dampened demand for government paper in the U.S., Europe and Japan.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +4.58%   surged 7.4 basis points to 1.862%, while the 2-year note rate TMUBMUSD02Y, +2.80%   was up 3.7 basis points to 1.631%. The 30-year bond yield TMUBMUSD30Y, +3.47%   climbed 7.1 basis points to 2.344%.

What’s driving Treasurys?

The Wall Street Journal and other media said the White House was considering rolling back some existing tariffs on $111 billion of Chinese imports that had been imposed on Sept. 1 in order to finalize the so-called phase one deal. Originally, the deal was only expected to prevent the imposition of additional tariffs set to kick in at mid-December.

The positive trade developments spurred selling in overseas bond markets also. The 10-year Japanese government bond yield TMBMKJP-10Y, +25.49%   jumped 6.3 basis points to negative 0.117%. while the 10-year German government bond yield TMBMKDE-10Y, +11.79%   was up 3.9 basis points to negative 0.312%, Tradeweb data show.

See: ‘A reflationary boom’ won’t be enough to send depressed bond yields higher, says JPMorgan

U.S. economic data also undermined safe-haven demand, with the Institute of Supply Management’s U.S. service sector activity index rose to 54.7% in October, up from 52.6% in September. Any reading above 50 indicates improving conditions.

An auction for $38 billion of U.S. Treasury 3-year notes drew solid demand after the bond-market selloff helped push yields to more attractive levels for income-hungry investors. The Treasury Department said because the 3-year notes sold at an interest rate and maturity matching an issue of a 10-year note, it would be considered a reopening of the 10-year note.

Investors also watched several speeches from senior Federal Reserve officials throughout the session. Richmond Fed President Thomas Barkin said a recession was not imminent.

What did market participants’ say?

“Trade progress via the US and China being said to consider partial tariff rollbacks, coupled with most recent top-tier data prints coming in stronger than consensus paints a textbook picture for higher rates and equities as near-term recessionary fears moderate,” said Jon Hill, an interest-rate strategist at BMO Capital Markets, in a research note.