November 5, 2019 / 10:38 AM / 16 days ago

UPDATE 2-Trade war hopes deal blow to safe-haven bond markets

* German, French, Dutch yields at 3-1/2 month highs

* German 20-year yield briefly turns positive

* Trade War optimism sparks bond sell-off

* Euro zone inflation expectations at 6-week high

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds German 20-year moving into positive territory, analyst quote, Irish and Portuguese spreads)

By Dhara Ranasinghe

LONDON, Nov 5 (Reuters) - Germany’s 20-year bond yield rose into positive territory on Tuesday for the first time since July, tracking moves on debt markets across the developed world on optimism around U.S.-China trade talks and robust U.S. service sector data.

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

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

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

This was followed by data from the U.S. services sector, which came in higher than consensus.

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

Germany’s 20-year bond yield rose to 0.001%, before falling back to -0.02%.

The yield has risen 40 bps since early-September in line with a significant upward move in yields across the euro zone in this period. Germany’s 30-year bond yield rose into positive territory in October.

Next in line is the French 10-year bond, which is hovering close to a return to positive territory after rising as high as -0.006%.

“Since last week positive headlines on China-U.S. trade, markets has supported this sell-off as well as a steepening of global rates across the board,” said TD Securities rates strategist Pooja Kumra.

“Today’s stronger data in US as well as the spring of issuance is also adding to the steepening pressure.”

In a sign that hopes for progress in U.S./China trade talks have boosted optimism about the global growth outlook, a key gauge of long-term euro zone inflation expectations rose above 1.25% to its highest in more than six weeks.

“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.

Analysts said fresh bond supply from the United States 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.

But other peripheral sovereigns outperformed on Tuesday.

The gap between Irish and German 10-year bond yields fell to its tightest level since April 2018 at 36 bps, while the gap with Portugal is at its lowest level since December 2009, at 55 bps.

Reporting by Dhara Ranasinghe, additional reporting by Yoruk Bahceli and Elizabeth Howcroft; Editing by Catherine Evans/ Kirsten Donovan/Jane Merriman

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