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U.S. Yields Soar to Three-Month High as Bets on Fed Cuts Slashed

John Ainger, Katherine Greifeld and Vivien Lou Chen

(Bloomberg) -- Treasuries tumbled Thursday as optimism about the prospect of a trade deal dented demand for bonds globally and led investors to trim bets on further Federal Reserve rate cuts.

Signs of progress in U.S.-China trade talks helped push the 10-year Treasury yield up as much as 14 basis points, at one stage putting it on track for its biggest daily jump since Nov. 9, 2016. The yield reached 1.97%, a level unseen since early August, before paring its climb to around 1.92%. The 30-year rate topped 2.44%, also a three-month high, as the government auctioned $19 billion of the maturity.

At the short-end, traders now doubt that the Fed will ease again at any point in the next two years. Policy makers have been signaling a pause after cutting rates for the third straight meeting in October, but traders had still been factoring some degree of easing as trade friction festered.

Now, with apparent relief on that front, “we have a big shift in the 2020 outlook,” said Tom Simons, a money-market economist at Jefferies. “Long-end yields are blowing up, but look at fed funds futures too -- cuts aren’t in the picture any more.”

In Europe, rates on benchmark 10-year French and Belgian securities climbed back above 0% for the first time in months, while globally the stock of bonds with sub-zero yields has shrunk to around $12.5 trillion, from about $17 trillion in August.

The current mood is a stark contrast to a few months ago, when investors were willing to accept negative yields to insulate their portfolios from the economic harm of the trade war.

With yield curves steepening of late, the market is signaling optimism that progress on the trade front and this year’s Fed rate cuts may have helped stave off a U.S. recession.

The cheerier economic outlook is a threat to the Treasury market’s top-performing trade. U.S. government debt due in a decade or more has returned about 16% this year through Nov. 6, on pace for its biggest annual gain since 2014, according to a Bloomberg Barclays index. But the performance is now faltering, with the measure extending declines to a third straight month.

--With assistance from Tasos Vossos, James Hirai and Benjamin Purvis.

To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net;Katherine Greifeld in New York at kgreifeld@bloomberg.net;Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, William Shaw, Mark Tannenbaum

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