"We had a lot of (Brexit) optimism after Thursday's meeting between Ireland and Britain, but those hopes have been dialled back a notch over the weekend," said Peter Schaffrik, global macro strategist at RBC Capital Markets in London. Having sold off on Friday amid growing optimism about a Brexit deal and US-China trade talks, bond markets across the euro area rallied on Monday, pushing yields lower.
Germany's 30-year bond yield, which pushed back above 0% late last week, tumbled 4.2 bps to 0.037%. Ten-year bond yields in France, the Netherlands and Italy were also down by 2 to 3 bps each. US and Chinese officials also said more work is needed before a trade agreement can be reached, even though US President Donald Trump on Friday outlined the first phase of a deal to end the trade war and suspended a threatened tariff increase set for Oct. 15.
Nevertheless, US Treasury Secretary Steven Mnuchin said on Monday that an additional round of tariffs on Chinese imports will likely be imposed if a trade deal with China has not been reached by then. Data from China underlined the bitter trade war with dollar-denominated exports and imports both falling by more than expected in September.
"The aggressive selloff of the last few days is not justified by the reality in terms of the economic situation, and in terms of the trade developments that are feasibly possible given the differences between the two sides," said Peter McCallum, rates strategist at Mizuho. "We do not expect improvement on the trade front to be sufficient as to prevent a material slowing in the US economy."
Unexpected signs of progress between the Irish and British governments on Brexit last week boosted hopes that one source of uncertainty that has hurt the growth outlook in world markets might finally be lifting.