TREASURIES-Italian vote pushes T-note yields to one-month lows

LONDON Tue Feb 26, 2013 6:37am EST

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LONDON Feb 26 (Reuters) - U.S. 10-year T-note yields fell to one-month lows in Europe on Tuesday as investors unnerved by an inconclusive result in Italian elections snapped up low-risk assets.

No party or likely coalition won enough seats to form a majority in the Italian upper house, raising the risk that policy paralysis in the highly indebted country would revive wider fears about euro sovereign debt.

The vote sparked a sell-off in lower-rated euro zone assets and a rally in assets perceived as safe havens, such as German Bunds and U.S. Treasuries.

Benchmark 10-year U.S. T-note yields were last flat at 1.87 percent, having hit a one-month low of 1.836 percent earlier in the session. T-note futures were 6/32 higher at 132-22/32.

"Risk appetite has waned on the back of the uncertain Italian election results. Political uncertainty seems to be the driving force today," RIA Capital Markets Nick Stamenkovic said.

The fall in yields was limited by caution before Federal Reserve Chairman Ben Bernanke's testimony before the Senate Banking Committee later in the day and looming debt sales.

The Treasury will auction $35 billion in five-year notes on Tuesday and $29 billion in seven-year notes on Wednesday. It sold $35 billion in two-year notes on Monday.

"We could see (10-year U.S.)yields going down to 1.80 (percent). Below that we need to see further deterioration in the political backdrop in Italy and/or further signs of weakness in the global economy," Stamenkovic said.

The 1.80 percent level has been the floor for T-note yields for this year, except for the first session when yields rose as markets cheered a deal to avoid the 'fiscal cliff' of $600 billion in U.S. tax hikes and budget cuts.

About $85 billion of across-the-board spending cuts could still enter into force on Friday, however, acting as a drag on the economy.

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