U.S. Government-Bond Yields Rise on Post-Brexit Trade Deal Hopes

U.S. Government-Bond Yields Rise on Post-Brexit Trade Deal Hopes

U.S. government-bond prices fell Wednesday as investors reacted to signs that U.K. and European Union officials were closing in on a new trade accord that would avoid tariffs being imposed at the start of next year.

In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 0.960{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c}, according to Tradeweb, compared with 0.917{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} Tuesday.

Yields, which rise when bond prices fall, initially declined early in the overnight session after President Trump criticized the roughly $900 billion coronavirus relief deal passed by Congress, raising questions about whether he might veto the legislation.

Yields, though, later reversed course and rose sharply in response to headlines that the U.K and EU might reach a trade deal as early as Wednesday. Absent a deal, tariffs would be applied Jan. 1 for the first time in nearly 50 years on some trade between the U.K. and the EU, causing an unwelcome economic disruption as countries are struggling with the coronavirus pandemic.

More directly impacted by the trade news, yields on European government bonds also climbed, with the 10-year German bond yield rising to minus 0.541{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} from minus 0.589{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} and the 10-year U.K. yield jumping to 0.285{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} from 0.186{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c}. In volatile trading, the British pound was recently up around 1.2{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} against the dollar at $1.3521.

Investors tend to sell government bonds when they are feeling better about the economic outlook, partly because faster growth can lead to a higher rate of inflation and less accommodative monetary policy from central banks. A stronger economy also encourages risk-taking, reducing the need to hold ultrasafe but low-yielding government debt.

Wednesday’s selling has pushed the U.S. 10-year yield to its closest in weeks to the psychologically significant threshold of 1{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c}, a level not seen since March when investors were first coming to grips with the widespread and deep impact of the pandemic.

Yields have climbed in recent months as investors first anticipated and then responded to coronavirus vaccine approvals in the U.S. and Europe. They were also boosted by progress toward the new coronavirus relief package in Congress, which investors hope can tide the economy over to the time when vaccines are more widely distributed.

Still, many investors have been hesitant to sell Treasurys before the coronavirus has actually been tamed and the economy has shown real signs of improvement.

Even when the economy does return to normal, many also expect years of sluggish inflation similar to what was happening before the pandemic. That in turn could ensure that the Federal Reserve keeps interest rates pinned near zero and prevent Treasury yields from rising much higher.

Footage shows long lines of trucks waiting to cross the English Channel ahead of the U.K.’s scheduled departure from the EU single market on Jan. 1. Some businesses have been stockpiling goods as new trade rules are still in limbo. Photo: Andy Rain/Shutterstock

Write to Sam Goldfarb at [email protected]

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