U.S. government bond prices fell on Wednesday as investors reacted to signals that UK and European Union officials were closing a new trade deal that would prevent the imposition of tariffs early next year.
In recent trading, the yield on the 10-year US Treasury note was 0.960%, according to Tradeweb, compared to 0.917% on Tuesday.
Yields, which rise as bond prices fall, initially declined early in the session overnight after President Trump criticized the $ 900 billion approved coronavirus relief deal by Congress, raising questions about whether it could veto legislation.
However, yields reversed course and rose sharply in response to headlines that the UK and EU could reach a trade deal as early as Wednesday. In the absence of an agreement, tariffs would be applied on 1 January for the first time in almost 50 years on some trade between the UK and the EU, which would lead to an unwanted economic disruption as countries are fighting the coronavirus pandemic.
With a more direct impact on trade news, European government bond yields also rose, with the yield on ten-year German bonds rising to minus 0.541% from minus 0.589% and the 10-year yield on the UK United jumped 0.285% from 0.186%. In volatile trading, the British pound has recently risen around 1.2% against the dollar, to $ 1.3521.
Investors tend to sell government bonds when they feel better about the economic outlook, in part because faster growth may lead to a higher inflation rate and less accommodative monetary policy by central banks. A stronger economy also encourages risk-taking, reducing the need to maintain an ultra-secure but low-yielding public debt.
Wednesday’s sell-off has pushed U.S. yields to a ten-year high in weeks to the psychologically significant 1% threshold, a level not seen since March, when investors were understanding the widespread impact and deep pandemic.
Yields have risen in recent months as investors first anticipated and then responded to coronavirus vaccine approvals in the United States and Europe. They were also driven by progress toward the new coronavirus relief package in Congress, which investors hope could add to the economy by the time vaccines are more widely distributed.
Still, many investors have been hesitant to sell Treasurys before the coronavirus has domesticated and the economy has shown real signs of improvement.
Even when the economy returns to normal, many also expect years of slow inflation similar to what happened before the pandemic. In turn, this could ensure that the Federal Reserve keeps interest rates set near zero and prevent Treasury yields from rising much further.
The images show long lines of trucks waiting to cross the English Channel before the UK’s scheduled exit from the EU single market on 1 January. Some companies have stored goods as new trade rules are still on the edge. Photo: Andy Rain / Shutterstock
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