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U.S. yields sink, tracking European bonds on Italy turmoil

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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – U.S. Treasury yields dropped to multi-week lows on Tuesday, pressured by declines in the European government bond market as a political crisis in Italy, the third-largest euro zone economy, fueled a flight to safe-haven assets.

U.S. two-year and 10-year yields, which move inversely to prices, 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.

The Italian crisis overshadowed Tuesday’s U.S. data on housing and consumer confidence which overall were positive for the economy.

In afternoon trading, U.S. 10-year yields dropped to seven-week lows of 2.759 percent <US10YT=RR> and were last at 2.788 percent.

U.S. 30-year yields fell to 2.954 percent, the lowest level since Feb. 1 and last traded at 2.98 percent <US30YT=RR>.

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 <US2YT=RR>.

A rush to safe havens briefly pushed Germany’s 10-year bond yield to 0.19 percent <DE10YT=RR>, 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 <IT2YT=RR>.

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.

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.

May 29 Tuesday 3:16PM New York / 1916 GMT

Price

US T BONDS JUN8 <UScv1> 146-9/32 2-19/32

10YR TNotes JUN8 <TYcv1> 121-44/256 1-80/256

Price Current Net

Yield % Change

(bps)

Three-month bills <US3MT=RR> 1.855 1.889 -0.008

Six-month bills <US6MT=RR> 1.98 2.0272 -0.044

Two-year note <US2YT=RR> 100-86/256 2.3271 -0.157

Three-year note <US3YT=RR> 100-142/256 2.4294 -0.182

Five-year note <US5YT=RR> 100-192/256 2.5891 -0.178

Seven-year note <US7YT=RR> 101-6/256 2.7135 -0.174

10-year note <US10YT=RR> 100-224/256 2.7738 -0.161

30-year bond <US30YT=RR> 103-32/256 2.9668 -0.127

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 24.25 4.00

spread

U.S. 3-year dollar swap 20.25 4.50

spread

U.S. 5-year dollar swap 11.50 1.00

spread

U.S. 10-year dollar swap 3.50 0.00

spread

U.S. 30-year dollar swap -11.25 -1.75

spread

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Richard Leong; Editing by Susan Thomas)

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