Trade deal optimism sends yields to highest levels this year

NEW YORK: US Treasury yields rose to their highest this year on Wednesday as optimism that the United States would reach a trade deal with China boosted risk appetite, and before the Treasury Department was due to sell a new 10-year supply.

Chinese and US teams ended trade talks in Beijing on Wednesday that lasted longer than expected and officials said details will be released soon, raising hopes of avoiding an all-out trade war that could badly disrupt the global economy.

"There were reports about progress in the China, US trade negotiation, although no deal has been struck yet. Nonetheless there is a sense of optimism associated with that," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

Stronger stock markets and risk appetite also reduced safe haven demand for bonds.

"I think there is still a subset of the market in the 'buy the dip' mentality for risk assets," Lyngen said.

Benchmark 10-year notes were last down 7/32 in price to yield 2.740 percent after earlier rising to 2.747 percent, the highest since Dec. 28.

The yields have fallen from 3.05 percent at the beginning of December as concerns about slowing global growth and US Federal Reserve interest rate increases prompted a sharp sell-off in stocks.

They rose from one-year lows reached last Thursday, however, after Fed Chairman Jerome Powell said on Friday he was aware of the risks of an economic slowdown and would be patient and flexible in policy decisions this year.

Investors will look for new clues on interest rate policy when the Fed releases minutes from its December meeting on Wednesday and in a speech by Powell on Thursday.

Market volatility has boosted expectations that the US central bank will not raise rates this year even though the Fed has signaled two hikes are likely.

The Treasury Department will sell $24 billion in 10-year notes on Wednesday, the second sale of $78 billion in coupon-bearing supply this week.

A $38 billion three-year note sale on Tuesday had the lowest ratio of bids to offers since April 2009.

The government will also sell $16 billion in 30-year bonds on Thursday.