December 3, 2019 / 11:26 AM / 4 days ago

UPDATE 2-European bond yields dive after Trump suggests trade agreement delay

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds information on more bonds and latest news)

By Saikat Chatterjee

LONDON, Dec 3 (Reuters) - European bond yields turned lower on Tuesday, reversing all the previous day’s gains, after U.S. President Donald Trump said he had no deadline for reaching a trade agreement with China, adding it could come after the 2020 U.S. election.

Irish 10-year government bond yields turned negative for the first time since Oct. 31 and U.S. 10-year Treasury yields plunged to 1.7%, their lowest since Nov. 1.

Fund managers have switched out of safe-haven assets such as bonds and the Japanese yen in recent weeks on growing expectations that Beijing and Washington were close to striking a deal after a trade conflict over the past 16 months.

Upward pressure on European bond yields has also been reinforced by some recent data that suggested the European economy be recovering after years of sub-par growth with ten-year German yields hitting a three-week high earlier.

“The year end may be playing a role given how well fixed income has performed this year but I suspect it is more to do with some improvements in data, particularly on the eurozone inflation and consumer spending side,” said Timothy Graf, head of macro strategy EMEA at State Street Global Markets.

But the latest comments from Trump undermined some of the bearish bets on the bond markets.

On top of that, U.S. Commerce Secretary Wilbur Ross on Tuesday told CNBC that Trump is under no time pressure to complete a deal.

Yields on benchmark 10-year German government debt slipped 7 bps to -0.347% after rising to -0.26% in early European trading, its highest in three weeks.

Irish 10-year yields were down 10 bps at -0.009%, while U.S. 10-year yields plunged 13 bps to 1.7054% as tough trade talk from Trump and other world leaders triggered a flight to safety among investors.

Concerns that a trade deal could be pushed out to next year could act as a further headwind for risky assets such as equities, and for the global economy, which is already struggling to gain traction while major central banks are reaching the limits in policy stimulus.

In China, Global Times, a tabloid published by the Chinese Communist Party’s official newspaper, the People’s Daily, tweeted on Tuesday that Beijing would soon release its so-called unreliable entities list, imposing sanctions against those who harm China’s interests.

Aside from macroeconomic reasons, political factors also played a part in pushing European bond yields higher.

The election on Saturday of Norbert Walter-Borjans and Saskia Esken for Germany’s Social Democrats raised the chances of an early election or minority government if the SPD leaves coalition government.

However, peripheral bonds remained under pressure as investors reduced some of their holdings of longer-maturity debt on riskier debt into the holidays. Yields on 10-year Italian bonds rose more than 1 bps to 1.4590%.

The move lower in German yields has narrowed the spread between German and U.S. benchmark yields to 209 bps and near its lowest since February 2018.

Though overnight reports showed U.S. factory activity and construction spending declined unexpectedly, investors were wary of pushing yields lower.

“After such a move higher in yields, there is the risk of some slight retracement today, but we think the underlying trend should be one of investors being reluctant to put on fresh long positioning at this stage in the year, and generally being cautious on risk,” Mizuho strategists said in a note.

Reporting by Saikat Chatterjee, additional reporting by Dhara Ranasinghe; Editing by William Maclean and Andrew Cawthorne

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