TREASURIES-Japan trade deal spurs risk-on move, pressuring US bonds

By Davide Barbuscia

NEW YORK, July 23 (Reuters) - U.S. Treasury prices declined on Wednesday after three consecutive days of gains, as a U.S. trade deal with Japan 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 Japan paying 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.

He also said European Union representatives would come to the U.S. for trade negotiations on Wednesday.

The 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 deals with other major U.S. trade partners could be announced ahead of an August 1 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.

On the economic front, data showed U.S. existing home sales fell more than expected in June, suggesting the housing market slump could be deepening as high mortgage rates and economic uncertainty deter potential buyers. Bond yields moved marginally lower after the data release.

Still, benchmark 10-year yields US10YT=RR were last at 4.366%, three basis points higher on the day, while two-year yields US2YT=RR, which more closely reflect expectations on monetary policy changes, were last at 3.844%, just over one basis point higher than on Tuesday.

Later on Wednesday, the Treasury Department will sell 20-year bonds worth $13 billion. The auction will be closely watched by investors as they continue to assess demand for long-dated U.S. debt and expectations mount of higher U.S. budget deficits.