NEW YORK: US 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.
US 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 US data on housing and consumer confidence which overall were positive for the economy.
In morning trading, US 10-year yields dropped to seven-week lows of 2.799 percent and were last at 2.878 percent.
US 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, US 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.
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