Investors sell bonds as trade deals boost stock markets
Political, fiscal risks in Japan weigh on US bond prices
Treasury 20-year auction meets solid demand
NEW YORK, – U.S. Treasury prices declined on Wednesday as a U.S. trade deal with Japan and a potential deal with the European Union triggered a risk-on move across global equity markets, prompting investors to sell safer bonds to buy stocks.
U.S. President Donald Trump said late on Tuesday the trade deal with Tokyo would include a lower-than-threatened 15% tariff on shipments to the U.S. in return for $550 billion of Japanese investments and loans in the United States.
Meanwhile, the European Union and the U.S. were heading for a
that includes a 15% U.S. baseline tariff on EU goods and possible exemptions, two European diplomats said on Wednesday.
The Japan trade deal, which followed similar agreements with the Philippines and Indonesia, boosted Japan’s Nikkei, with automaker shares soaring, and it injected optimism across markets that a deal with the EU could be announced ahead of an August 1 tariff deadline.
“Today we’re seeing a heavy risk-on type of trade,” said Tom Di Galoma, managing director at Mischler Financial Group. “I think the EU is hopeful that they’ll get the same deal that Japan got.”
Other news from Japan added downward pressure on bond prices, pushing Treasury yields higher.
The trade agreement boosted expectations of a Bank of Japan rate hike, lifting short-term JGB yields, while longer-term yields climbed as local media reports suggested Prime Minister Shigeru Ishiba may step down, raising the chances of looser fiscal policy. Ishiba has denied those reports.
The Japanese 10-year yield meanwhile reached its highest since 2008 after demand for a 40-year bond auction fell to the weakest level since 2011.
“Whilst Japanese equities have rallied overnight, it’s been a different story for the country’s bond markets … and that’s cascaded across global markets too,” Jim Reid, an analyst at Deutsche Bank, wrote in a note.
On the economic front, data showed U.S. existing home sales fell more than expected in June. Bond yields moved marginally lower after the data release.
“The existing home sales market continues to struggle under high home prices as well as high mortgage rates,” said Raymond James Chief Economist Eugenio Aleman, in a note.
Still, benchmark 10-year yields rose by over five basis points from Tuesday to 4.388%. Two-year yields , which more closely reflect expectations on monetary policy changes, were last at 3.882%, also about five bps higher on the day.
A U.S. government debt sale of 20-year bonds on Wednesday was well received, despite lingering concerns in the market over U.S. fiscal health and widening U.S. government debt levels.
The 20-year bonds, worth $13 billion, were sold with a high yield of 4.935%, nearly two basis points below the market at the bidding deadline, a sign investors were willing to pay up to absorb the issuance.
The U.S. government has not increased auction sizes for long-dated debt, which is supportive for demand, said Jan Nevruzi, a rates strategist at TD Securities.
However, term premiums – a measure of the compensation required by investors for the risk of holding long-dated debt – are likely to remain elevated, he said.
“The curve has not been flattening out alongside worries that the economy is going to slow down,” said Nevruzi.
This article was generated from an automated news agency feed without modifications to text.
