US yields sink, tracking European bonds on Italy turmoil

NEW YORK: US 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.

US two-year and 10-year yields, which move inversely to prices, dropped to seven-week lows and slid for four straight sessions.

US 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 US 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 US data on housing and consumer confidence which overall were positive for the economy.

In afternoon trading, US 10-year yields dropped to seven-week lows of 2.759 percent and were last at 2.788  percent.

US 30-year yields fell to 2.954 percent, the lowest level since Feb. 1 and last traded at 2.98 percent.

On the short-end of the curve, US 2-year yields tumbled to seven-week troughs of 2.311 percent. They last changed hands at 2.331 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 .

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.