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Euro zone bond yields inch up on US-China trade hopes

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Euro zone government debt yields rose on Wednesday, retracing some of the previous day's steep falls, as reports that the United States and China were edging nearer to a preliminary deal to end their trade war fuelled a broad sell-off in "safe" assets.

[LONDON] Euro zone government debt yields rose on Wednesday, retracing some of the previous day's steep falls, as reports that the United States and China were edging nearer to a preliminary deal to end their trade war fuelled a broad sell-off in "safe" assets.

A source-based report from Bloomberg said Washington and Beijing are moving closer to agreeing on the amount of tariffs to be rolled back in a phase-one trade deal.

That came after US President Donald Trump said on Tuesday a trade deal may not happen for another year, comments that sent investors scurrying for safe havens and fuelled the biggest one-day rally in German 10-year bonds since mid-June.

In contrast, Mr Trump, speaking at a meeting of NATO leaders near London, said on Wednesday that talks with China were going "very well".

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Germany's 10-year bond yields inched up around 3 basis points to -0.315 per cent after Wednesday's Bloomberg headline, though they stayed close to five-day lows hit on Tuesday.

Yields across the euro area followed suit, rising by 2 to 3 bps and Irish 10-year yields also turned positive, having dived into negative territory on Tuesday for the first time since October.

While US data sowed some doubts about the strength of consumption in the world's biggest economy, 10-year Treasury yields were nonetheless up 7.5 bps, rising off Tuesday's one-month lows to 1.783 per cent.

The Institute for Supply Management (ISM) said a non-manufacturing activity index slowed more than expected. Data also showed private US employers had added fewer jobs than expected.

In Europe on the other hand, the euro zone composite final purchasing managers' index was better than expected.

"We have started to see tentative signs of stabilisation in the growth backdrop, that's the picture in China and Europe but US data is a bit more mixed," said Matthew Merritt, head of multi-asset strategy at Insight Investment.

"What's happening is a battle between signs of economic stabilisation, set against negative noises on trade. But the ebb and flow of trade noise changes quite radically and you have to be circumspect in taking one tweet or quote as a statement of fact."

There are now less than two weeks until Dec 15, when new tariffs on Chinese imports to the US are set to take effect. But chances of an agreement have been complicated by a US bill in support of pro-democracy protesters in Hong Kong and China's Muslim minority in Xinjiang.

REUTERS