Talk of World’s Biggest Deal Buffets World’s Biggest Bond Market

(Bloomberg) -- Speculation over the biggest deal in global trade is dragging the world’s biggest bond market around, sending Treasury yields veering back toward their highs for the month.

The benchmark 10-year yield vaulted about 13 basis points during the session, to as high as 1.67%, as much-anticipated talks between the U.S. and Chinese delegations got underway in Washington, with both sides signaling cautious optimism. The market move gained momentum from President Donald Trump’s tweet declaring that he would meet with Chinese Vice Premier Liu He on Friday.

The move establishes some direction for the market after a wild Asia session in futures, thanks to at-times conflicting reports about the prospects for the meeting and possible progress. And it’s a reversal in the trend of rallies over the past month, which at the start of the week had the benchmark 10-year headed back down toward 1.5%.

“I think we’re going to see higher yields and much steeper curves,” said Peter Tchir, head of macro strategy at Academy Securities. “I don’t think we’re going to get much more than a trade truce, but I think that will be enough.”

He expects that progress on a U.S.-China deal will ease recession concerns. That could send the 10-year yield back into the 1.80%-2% range it plied in mid-September as soon as this month.

Trade may be the dominant driver at the moment, but it’s not the only one weighing on the $16 trillion Treasury market. Add to this the narrowing deadline for the U.K. to leave the European Union at the end of this month, and the possibility of a breakthrough in talks between the British and Irish leaders.

Technical factors are contributing to pressures, including widening in U.S. dollar swap spreads. And Thursday afternoon’s auction of 30-year Treasury bonds has also spurred investors to build some discount into the far end of the curve.

--With assistance from Edward Bolingbroke.

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Debarati Roy

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