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10-Year Treasury Yield Hits More Than Three-Week High on Prospect of Brexit Deal

U.S. Treasury yields rose Tuesday, putting government bonds under pressure, after reports suggested the U.K. was nearing a deal to leave the European Union, reducing geopolitical risk further after at least a truce in the U.S-China trade war last Friday.

How are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, 0.591% rose 2.5 basis points to 1.773%, its highest since Sept. 19, while the 2-year note rate TMUBMUSD02Y, 0.224% was up 1.3 basis points to 1.622%. The 30-year bond yield TMUBMUSD30Y, 1.167% ticked higher by 2.7 basis points to 2.238%, its highest since Sept. 17.

What’s driving Treasurys?

The earlier bullish tone in Treasurys gave way to a selloff after a report from Bloomberg suggested the U.K. and the EU were close to reaching a draft Brexit agreement. Optimistic comments by Michel Barnier, the top EU negotiator, also helped to bolster hopes.

The 10-year U.K. government bond yield TMBMKGB-10Y, 0.294% rose 5.5 basis points to 0.694%, Tradeweb data show.

Investors initially dived into government paper on Tuesday after news reports said the so-called “phase 1” U.S.-China trade deal described by President Donald Trump was not finalized, and that Beijing wanted to iron out a few details before it committed to the agreement. It was the first chance for traders to assess the merits of Trump’s trade agreement after the weekend, with bond-markets closed on Monday in observance of the U.S. Columbus Day holiday.

However, investors also saw renewed signs of weakness in export-dependent Germany, the largest economy in the European Union. The German ZEW economic sentiment index fell to a reading of negative 22.8 points this month, from negative 22.5 points in September. Reuters reported the German government now expected gross domestic product to expand by a 1% pace next year, from 1.5% before, according to a source familiar with the matter.

And in its World Economic Outlook, published Tuesday, the IMF sees global economic growth falling to 3% this year, the slowest pace since the 2008 financial crisis.

St. Louis Fed President James Bullard, one of the most dovish members at the Fed, made the case in a speech in London for further interest rate cuts to protect against downside risks but said the central bank will be cautious in making more rate cuts.

What did market participants’ say?

“If you look at today, the gilt market is leading the way down. There’s optimism in the way of trade and a potential deal on Brexit,” Gregory Faranello, head of U.S. rates strategy at AmeriVet Securities, told MarketWatch.

By: Sunny Oh