UPDATE 2-European bonds hold above 1-month lows as U.S.-China trade deal awaited

Core European government debt steadied on Wednesday, with yields on benchmark German 10-year bonds holding above one-month lows as investors awaited for developments on the first phase of a trade deal between the United States and China. With very little major data out before a U.S. holiday on Thursday, major bond markets remained pinned in tight ranges.

The United States and China are close to agreement on the first phase of a trade deal, U.S. President Donald Trump said on Tuesday after top negotiators from the two countries spoke by telephone and agreed to keep working on remaining issues. Trump said Washington was in the "final throes" of work on a deal that would end a 16-month trade war with Beijing, but he also reiterated Washington's support for protesters in Hong Kong, a huge sore point with China.

"The market is getting headline fatigue on the trade deal front and until we see a definite agreement, bonds will remain subdued," said Lyn Graham-Taylor, a fixed-income strategist at Rabobank. Benchmark German 10-year bond yields were flat at -0.377%, holding above a November low of -0.384%. Yields across the bond curve have traded in a tiny 5 bps range across the curve over the past month, an indicator of how overall market moves have been.

Risky assets got some help overnight with Wall Street indexes reaching a record high, and safe-haven government bonds saw some demand as investors waited for progress in trade talks. U.S. Treasury yields were also lower, with benchmark 10-year yields last at 1.741%, down from 1.79% on Monday. Month- and year-end portfolio rebalancing helped support demand for U.S. bonds.

In keeping with the broader trend of tiny price moves across asset markets - overall currency market volatility is at a record low - U.S. Treasury bond volatility is at its lowest level in four months. The data calendar is relatively thin with only U.S. inflation, a revision of U.S. third-quarter growth and the Fed's Beige Book survey out later in the session.

 

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