May 29, 2018 / 2:45 PM / 3 months ago

TREASURIES-U.S. yields tumble in line with European bonds on Italy crisis

    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 29 (Reuters) - U.S. Treasury yields fell to
multi-week lows on Tuesday, pressured by declines in the
European government bond market after a deepening political
crisis in Italy fueled a flight to safe-haven assets.
    U.S. 10-year note and 30-year bond yields, which move
inversely to prices, dropped to seven-week lows, while those on
two-year notes slid to six-week troughs.
    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.
    "We had a lot of pressured buying in the high-grade European
sovereign bond market that immediately spilled over to
Treasuries," said Jim Vogel, interest rates strategist, at FTN
Financial in Memphis, Tennessee. 
    "The European bond market is not just large enough to meet
immediate demand. To manage the global risk that's focused on
the European Union, investors have to come over and buy
Treasuries," he added.
    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.
    But he warned that if a referendum on euro membership was
called, it would pose a "systemic and existential risk" to the
whole euro project.
    The Italian crisis overshadowed Tuesday's U.S. data on
housing and consumer confidence which overall were positive for
the economy.
    In morning trading, U.S. 10-year yields dropped to
seven-week lows of 2.799 percent and were last at
2.878 percent.
    U.S. 30-year yields fell to 2.985 percent, the lowest level
since April 11 and last traded at 3.050 percent.
    On the short-end of the curve, U.S. 2-year yields tumbled to
six-week troughs of 2.383 percent. They last changed hands at
2.443 percent.
    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
.
    The rise in borrowing costs and potential knock-on effects
on the euro bloc saw money markets further trim bets that the
ECB will raise interest rates in June 2019. They now bet on a 30
percent chance of a 10 bps rate rise that month, half of what
was priced last week
    
    May 29 Tuesday 10:26AM New York / 1426 GMT
                               Price                  
 US T BONDS JUN8               144-20/32    0-30/32   
 10YR TNotes JUN8              120-80/256   0-116/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.8625       1.8967    0.000
 Six-month bills               2.0075       2.0557    -0.015
 Two-year note                 100-28/256   2.4436    -0.040
 Three-year note               100-44/256   2.5641    -0.047
 Five-year note                100-48/256   2.7096    -0.057
 Seven-year note               100-76/256   2.828     -0.059
 10-year note                  99-248/256   2.8785    -0.056
 30-year bond                  101-108/256  3.0522    -0.042
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        22.75         2.50    
 spread                                               
 U.S. 3-year dollar swap        18.50         2.75    
 spread                                               
 U.S. 5-year dollar swap        11.25         0.75    
 spread                                               
 U.S. 10-year dollar swap        3.75         0.25    
 spread                                               
 U.S. 30-year dollar swap       -9.75        -0.25    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Susan Thomas)
  
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