By Avantika Chilkoti
A surge in government-bond yields world-wide carried the yield on the benchmark 10-year Treasury note to its highest close in three months on Thursday, as signs of further progress in trade negotiations between the U.S. and China stoked investor optimism.
The yield on the benchmark 10-year Treasury note was recently at 1.924%, according to Tradeweb, rising from 1.814% on Wednesday to its highest close since late July. Yields rise as bond prices fall.
In Europe, negative yields on some long-term government bonds -- which had alarmed investors when they proliferated earlier in the year -- faded amid evidence that easier monetary policy and potentially constructive political developments may have helped the world's biggest economies dodge a major growth slowdown.
The yield on 10-year bonds issued by the French and Belgian governments turned positive Thursday for the first time since mid-July. Other European countries that experienced negative long-term rates for the first time, including Ireland, Spain and Portugal, have also returned to positive territory in recent weeks.
The total amount of negative-yielding debt world-wide fell to about $12.5 trillion, according to Deutsche Bank Securities, from a peak of $17 trillion in August.
Meanwhile, yields on 10-year German bunds, while still negative, hit their highest level since the middle of June, according to Tradeweb data, yielding minus-0.245% on Thursday. The yield on comparable Irish debt reached 0.136%, its highest level since July 30.
"Multiple markets are confirming what could be a regime change in sentiment," said Donald Ellenberger, who manages multisector strategies at Federated Investors.
Hopes of an initial trade deal between the U.S. and China this week help the outlook for Germany's export-dependant economy -- the eurozone's largest -- in particular, investors say.
Economic data out this week showed German factory orders rose 1.3% in September on the back of strong demand at home and beyond the eurozone. And the composite purchasing managers index for the eurozone, which covers manufacturing and services activity, was raised to 50.6 from 50.2 for the month of October. A level above 50 signals expansion.
In the U.S., last week's robust employment report sparked hopes that the Federal Reserve's rate cuts are buoying the economy after several months of uneven data. Investors, who began the year betting that policy makers would cut interest-rates, are now wagering that they hold rates steady through next year.
The rise in yields on long-term government debt in Europe comes as short-term yields have remained negative, thanks to additional stimulus unveiled by the European Central Bank in September.
"The fact that the yield curve has been steepening in a bond-market selloff has been consistent with the market discounting a better macro outlook ahead," said Stefano Di Domizio, head of fixed-income trading strategy for Absolute Strategy Research.
The most direct beneficiary of the rise in yields has been bank stocks, especially in Europe, where negative rates have hit lenders hardest. Lenders will potentially make more money since their borrowing costs tend to be tied to short-term yields while they lend at rates that are connected to longer term yields.
Individual European banks have been among the best-performing major stocks anywhere. Italy's biggest bank UniCredit SpA is up by nearly one-quarter in the past month. France's Société Générale SA has risen 21%. The Stoxx Europe 600 Bank Index overall has rallied 12% over the past month, outperforming the broader market.
The financial sector has been helped, in particular, by rate cuts and a package of stimulus measures from the ECB in September, which included a fresh round of asset purchases and cheap lending to banks.
While rates have risen, they are still low enough across the region to encourage national governments to borrow more and spend on stimulus measures. Some investors are hoping such spending will keep economies from sliding back into recession.
"If they don't do it now, I don't see when they will do it," said Patrick Zweifel, chief economist at Pictet Asset Management.
--Daniel Kruger, Ira Iosebashvili, Caitlin Ostroff and Anna Isaac contributed to this article.
Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com