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Bond Yields Are Climbing Rapidly From March's Two-Year Lows

Bond Yields Are Climbing Rapidly From March's Two-Year Lows

(Bloomberg) -- Bonds yields rose across major developed markets amid hopes of progress on Brexit and global trade talks, extending their climb from the two-year lows reached last month. Investors are wary of calling this latest wrench in whipsawed markets a trend, however.

Benchmark German and British yields jumped the most in three months. The 10-year bund yield turned positive for the first time in more than a week, and the U.S. benchmark climbed back above 2.5 percent. Euro-area services data beat estimates, while expectations rose that the U.K. will avoid a disruptive divorce with the European Union after Prime Minister Theresa May asked opposition leader Jeremy Corbyn to help break the deadlock.

Bond Yields Are Climbing Rapidly From March's Two-Year Lows

“If it seems that Europe is not headed for as deep a slowdown, if it seems like Brexit risk can be taken off the table for a period of time, and it seems like there’s a clear path on U.S.-China trade,” said Mark Cabana, the head of U.S. rates strategy at Bank of America. “Then I’d certainly expect risk assets to perform well and yields to rise.”

Global bonds are pulling back after surging in March, when yields plunged as concern about signs of slowing growth and increased political risk coursed through markets. The latest moves have cured inversions in both U.S. and Canadian curves -- typically considered harbingers of recession.

While the latest economic data has gone some way toward improving investor sentiment, IMF Managing Director Christine Lagarde warned Tuesday that global growth has lost momentum since the start of the year. And there’s still plenty of room for things to go terribly wrong in both Brexit and the U.S.-China trade negotiations.

“We are on shaky ground,” said Jan von Gerich, the chief strategist at Nordea Bank Abp. “I don’t think we are about to see a big move higher in yields going forward. The outlook simply remains too uncertain.”

U.K. 10-year yields jumped as much as nine basis points to 1.09 percent, the largest increase since Jan. 4, before coming back slightly. Those in Germany rose six basis points to touch 0.01 percent after reaching the lowest level in more than two years last week. Yields on similar-maturity U.S. Treasuries climbed three basis points to 2.51 percent.

Optimists have taken heart from this week’s manufacturing data releases. China’s purchasing managers index suggested renewed expansion in the sector, and the U.S. Institute for Supply Management survey indicated activity has accelerated.

“You’re already starting to see some green shoots out of China,” said Matt Eagan, a fixed-income portfolio manager at Loomis, Sayles & Co. He expects a global reflation trade, as a rebound in the world’s second-largest economy spreads to Europe.

“Once that happens, people will be looking at the U.S. and seeing a tight, tight labor market,” said Eagan, who is looking to add to short positions in the Treasury market, focusing on the five-year part of the curve.

Investors globally will be closely following progress in Washington-Beijing trade talks as Chinese Vice Premier Liu resumes negotiations with his counterparts Wednesday. Should tensions defuse further, that could provide another push higher for yields.

“European government bonds are following global developments,” said Peter Chatwell, head of rates strategy at Mizuho.

--With assistance from Anil Varma and Neil Chatterjee.

To contact the reporters on this story: Charlotte Ryan in London at cryan147@bloomberg.net;John Ainger in London at jainger@bloomberg.net;Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, ;Benjamin Purvis at bpurvis@bloomberg.net, Brendan Walsh, Dave Liedtka

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