May 29, 2018 / 9:25 PM / 6 months ago

TREASURIES-U.S. 10-year yields post largest one-day drop since Brexit

    * U.S. 2-year, 10-year note yields drop to 7-week lows
    * U.S. 30-year bond yields fall to four-month low
    * Italian debt volume surges this month -Tradeweb

 (Updates prices in text, table, recasts lead, adds Treasury
volume)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 29 (Reuters) - U.S. benchmark 10-year Treasury
yields posted their largest one-day drop on Tuesday since
Britain voted to exit the European Union nearly two years ago,
as a political crisis in Italy, the third-largest euro zone
economy, fueled a flight to safe-haven assets.
    The steep rally in Treasury prices on Tuesday could be a
blip in what has been a relentless sell-off since early
September. Interest rates have been supported by the Federal
Reserve's tightening policy with 10-year Treasury yields rising
to a high of 3.12 percent earlier this month. 
    U.S. two-year yields, which move inversely to prices, also
showed steep declines, with their largest one-day drop in more
than nine years. 
    Both the U.S. two-year and 10-year yields dropped to
seven-week lows and slid for four straight sessions.
    U.S. 30-year bond yields, on the other hand, sank to a
nearly four-month low. 
    The fall in yields came after Italy's president appointed a
former International Monetary Fund official as interim prime
minister, who has to plan for fresh elections and pass a budget.

    Investors believe the election will further underpin a
mandate for anti-establishment, euro-skeptic politicians,
stoking worries about Italy's future in the euro zone.
    The extent of the rally in U.S. Treasuries reflects
investors' perception of Italy's political problems, said Robert
Tipp, chief investment strategist at PGIM Fixed Income in
Newark, New Jersey. 
    "This situation with Italy is serious and will take some
time and there are a wide range of possible outcomes. Treasuries
are one of the few safe places to go to," Tipp said. "It depends
on how bad things get in Italy. You can't rule out 2.50 percent
on the (U.S.) 10-year yield."
    Analysts believed though that the Italian situation is
contained for now. The spreads of other peripheral government
bond yields over German Bunds have increased, but not by a
substantial level.
    "This suggests that investors are for now fairly confident
that the euro-zone as a whole will be able to withstand the 
current political uncertainty in Italy," said Stephen Brown,
European economist at Capital Economics in London.
    In afternoon trading, U.S. 10-year yields dropped to
seven-week lows of 2.759 percent and were last at
2.788  percent. Yields fell 14.6 basis points, the largest
decline since June 24, 2016.
     U.S. 10-year Treasury futures were on track to record their
highest single-day volume ever, according to a CME Group
spokeswoman said. As of late Tuesday, a combined 8.58 million
10-year T-note futures changed hands with roughly 5.31 million
contracts for June delivery transacted TYM8, according to CME
data.
    U.S. 30-year yields fell to 2.954 percent, the lowest level
since Feb. 1 and last traded at 2.975 percent.
Thirty-year yields slid nearly 12 basis points, the largest
daily fall since June 2016.
    On the short-end of the curve, U.S. 2-year yields tumbled to
seven-week troughs of 2.311 percent. They last changed hands at
2.331 percent, falling nearly 15 basis points, the
most since March 2009. 
    A rush to safe havens briefly pushed Germany's 10-year bond
yield to 0.19 percent, its lowest in more than a
year. 
    Investors, however, sold Italian bonds, as short-term yields
 were on track for their biggest one-day jump since 1992
.
    Tradeweb Markets LLC reported on Tuesday that average
trading volume in Italian debt rose more than 60 percent in May
compared with both the previous month and a year earlier, as
market volatility rose around political news in Italy.
    
      May 29 Tuesday 4:53PM New York / 2053 GMT
                               Price                  
 US T BONDS JUN8               146-6/32     2-16/32   
 10YR TNotes JUN8              121-16/256   1-52/256  
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.8575       1.8916    -0.005
 Six-month bills               1.985        2.0324    -0.039
 Two-year note                 100-84/256   2.3311    -0.153
 Three-year note               100-130/256  2.4459    -0.165
 Five-year note                100-180/256  2.5991    -0.168
 Seven-year note               100-240/256  2.727     -0.160
 10-year note                  100-192/256  2.7881    -0.147
 30-year bond                  102-240/256  2.9761    -0.118
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        24.50         4.25    
 spread                                               
 U.S. 3-year dollar swap        19.75         4.00    
 spread                                               
 U.S. 5-year dollar swap        11.75         1.25    
 spread                                               
 U.S. 10-year dollar swap        3.50         0.00    
 spread                                               
 U.S. 30-year dollar swap      -11.00        -1.50    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Richard Leong
Editing by Susan Thomas and Diane Craft)
  
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