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Investors sell bonds as trade deals boost stock markets

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Political, fiscal risks in Japan weigh on US bond prices

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Treasury 20-year auction meets solid demand

(Adds context, auction results, analyst comments, graphic;

updates yields)

By Davide Barbuscia

NEW YORK, July 23 (Reuters) - U.S. Treasury prices

declined on Wednesday as a U.S. trade deal with Japan and a

potential deal with the European Union triggered a risk-on move

across global equity markets, prompting investors to sell safer

bonds to buy stocks.

U.S. President Donald Trump said late on Tuesday the trade

deal with Tokyo would include a lower-than-threatened 15% tariff

on shipments to the U.S. in return for $550 billion of Japanese

investments and loans in the United States.

Meanwhile, the European Union and the U.S. were heading

for a

potential trade deal

that includes a 15% U.S. baseline tariff on EU goods and

possible exemptions, two European diplomats said on Wednesday.

The Japan trade deal, which followed similar agreements with

the Philippines and Indonesia, boosted Japan's Nikkei, with

automaker shares soaring, and it injected optimism across

markets that a deal with the EU could be announced ahead of an

August 1 tariff deadline.

"Today we're seeing a heavy risk-on type of trade," said Tom

Di Galoma, managing director at Mischler Financial Group. "I

think the EU is hopeful that they'll get the same deal that

Japan got."

Other news from Japan added downward pressure on bond

prices, pushing Treasury yields higher.

The trade agreement boosted expectations of a Bank of Japan

rate hike, lifting short-term JGB yields, while longer-term

yields climbed as local media reports suggested Prime Minister

Shigeru Ishiba may step down, raising the chances of looser

fiscal policy. Ishiba has denied those reports.

The Japanese 10-year yield meanwhile reached its highest

since 2008 after demand for a 40-year bond auction fell to the

weakest level since 2011.

"Whilst Japanese equities have rallied overnight, it's been

a different story for the country's bond markets ... and that's

cascaded across global markets too," Jim Reid, an analyst at

Deutsche Bank, wrote in a note.

SUPPLY

On the economic front, data showed U.S. existing home sales

fell more than expected in June. Bond yields moved marginally

lower after the data release.

"The existing home sales market continues to struggle under

high home prices as well as high mortgage rates," said Raymond

James Chief Economist Eugenio Aleman, in a note.

Still, benchmark 10-year yields rose by over

five basis points from Tuesday to 4.388%. Two-year yields

, which more closely reflect expectations on monetary

policy changes, were last at 3.882%, also about five bps higher

on the day.

A U.S. government debt sale of 20-year bonds on

Wednesday was well received, despite lingering concerns in the

market over U.S. fiscal health and widening U.S. government debt

levels.

The 20-year bonds, worth $13 billion, were sold with a

high yield of 4.935%, nearly two basis points below the market

at the bidding deadline, a sign investors were willing to pay up

to absorb the issuance.

The U.S. government has not increased auction sizes for

long-dated debt, which is supportive for demand, said Jan

Nevruzi, a rates strategist at TD Securities.

However, term premiums - a measure of the compensation

required by investors for the risk of holding long-dated debt -

are likely to remain elevated, he said.

"The curve has not been flattening out alongside worries

that the economy is going to slow down," said Nevruzi.