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.