June 5, 2018 / 6:04 PM / a year ago

TREASURIES-U.S. yields fall as worries about Italy resurface

    * Italy's new PM outlines budget-busting economic plan
    * Upcoming debt auctions, Fed meeting temper Treasuries
    * Upbeat U.S. services data briefly pare bond purchases

 (Updates market action, adds quote, graphic)
    By Richard Leong
    NEW YORK, June 5 (Reuters) - U.S. Treasury yields fell on
Tuesday as traders piled back into lower-risk government debt
after Italy's new prime minister vowed to enact economic
policies that could balloon the nation's already-heavy debt
    Traders lightened their Italian bonds in favor of Treasuries
and German Bunds as Italian Prime Minister Giuseppe Conte's
pledge for tax cuts and more welfare spending overshadowed
encouraging business data on Italy and Spain, the euro zone's
third- and fourth-largest economies.
    "The market is just following Italian spreads as a gauge,
but it seems to be settling down here," said Dan Mulholland,
head of Treasury trading at Credit Agricole in New York.
    At 1:46 p.m. EDT (1746 GMT), the yield on benchmark 10-year
Treasury notes was 2.915 percent, down 2 basis
points from late on Monday. It reached a one-week high of 2.946
percent the prior session due to reduced fears about political
turmoil in Italy and Spain.
    Ten-year German yield fell 5 basis points to
0.369 percent, Reuters data showed.
    On the other hand, 10-year Italian yield jumped
21 basis points to 2.773 percent after hitting a one-week low of
2.509 percent on Monday.
    "We have to be mindful of political risks. Italy represents
a material headwind for markets," said Bill Merz, head of fixed
income research at U.S. Bank Wealth Management in Minneapolis.
    Daily trading volume has fallen following the record high
level of bond futures transacted a week ago, when traders rushed
out their bearish bets against Treasuries on fears that Italy's
anti-establishment parties would push the country to leave the
euro zone.
    Tuesday's buying of Treasuries was tempered ahead of the
Treasury Department's announcement of next week's government
debt auctions and the Federal Reserve's two-day policy meeting,
analysts said.
    An unexpected pickup among U.S. service industries in May,
according to the Institute for Supply Management, briefly
trimmed buying in Treasuries earlier on Tuesday. 
    Interest rates futures implied traders saw a 92 percent
chance the U.S. central bank would raise overnight borrowing
costs by a quarter point to 1.75-2.00 percent next Wednesday,
CME Group's FedWatch program showed.
    The Federal Open Market Committee, the Fed's policy-setting
group, last increased short-term rates in March.
    Tuesday, June 5 at 1348 EDT (1748 GMT):
 US T BONDS SEP8               143-19/32    11/32     
 10YR TNotes SEP8              119-188/256  8/32      
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             1.9125       1.9486    0.003
 Six-month bills               2.075        2.1262    0.000
 Two-year note                 100-6/256    2.4877    -0.020
 Three-year note               100-8/256    2.6136    -0.025
 Five-year note                99-248/256   2.7567    -0.027
 Seven-year note               100-16/256   2.865     -0.031
 10-year note                  99-168/256   2.9149    -0.022
 30-year bond                  101-28/256   3.068     -0.015
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       42.50        0.30      
 30-year vs 5-year yield       30.90        2.05      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        26.50         0.75    
 U.S. 3-year dollar swap        21.75         1.00    
 U.S. 5-year dollar swap        13.50         0.50    
 U.S. 10-year dollar swap        5.75         0.00    
 U.S. 30-year dollar swap       -8.25        -0.75    
 (Reporting by Richard Leong
Editing by Susan Thomas and Will Dunham)
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