Investors dump safe-haven bonds on trade deal hopes

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Eurozone bond yields climbed to 3.5 month highs on Tuesday on optimism that US-China trade talks will lead to a de-escalation in tensions between the world’s two biggest economies.

China is pushing US President Donald Trump to remove more tariffs imposed in September, according to overnight reports, while Beijing and Washington spoke of progress in the talks.

US Commerce Secretary Wilbur Ross meanwhile said licenses for US companies to sell components to China’s telecoms giant Huawei will come “very shortly.”

Investors reacted with optimism – rushing into stock markets, boosting China’s offshore yuan to a three-month high against the dollar and dumping safe-haven bonds.

Across the euro area, most 10-year bond yields climbed 2-3 basis points to their highest levels since mid-July.

Germany’s 10-year bond yield rose as high as -0.308 percent, while the French 10-year hit -0.006 percent – within striking distance of positive territory.

In price terms, Germany’s 10-year bond has lost just over 4 percent of its value since early September.

“People are trading the trade headlines like the sunny side up - they are tending to see the positive side,” said Lyn Graham-Taylor, a fixed income strategist at Rabobank in London.

US Treasury yields also headed higher, with 10-year yields rising to near a one-week high of 1.83 percent, while the US yield curve was at its steepest in three months.

And in a sign that hopes for progress in US/China trade talks have boosted optimism about the global growth outlook, a key gauge of long-term eurozone inflation expectations rose above 1.25 percent to its highest in more than six weeks.

“There’s no central bank action until December so the trade war talks are the main theme,” said Pooja Kumra, European rates strategist at TD Securities in London. “And so far there has been nothing negative.”

Analysts said fresh bond supply from the US and Europe added to upward pressure on yields. Austria sold almost one billion euros of five and 10-year bonds.

Spain, which holds an election on Sunday, also moved into focus.

On Monday, the main candidates to become Spain’s next prime minister clashed over how to handle Catalan separatism, as they tried to woo voters ahead of a repeat election that opinion polls show could be as inconclusive as the one in April.

The closely-watched gap between Spanish and German 10-year bond yields on Monday widened to around 67 bps, its highest level since mid-October – suggesting some unease among investors as Sunday’s election draws closer.

“An election should add uncertainty as to the future trajectory, in turn pushing forward spreads wider,” analysts at Mizuho said in a note.

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