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BOND REPORT : Treasury Yields Fall As Trade Tensions And Italy Fears Stoke Demand For Havens

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06/21/2018 | 09:54pm CEST

By Sunny Oh

Treasury prices rose, pushing yields lower, on Thursday after investors grappled with the potential threat of a euroskeptic policies in Italy and the impact of protectionism on a global economy already reeling from a strong dollar and higher interest rates in the U.S.

What's the market doing?

The 10-year Treasury note yield fell by 2.9 basis points to 2.899%. The 2-year note yield was down 2.1 basis points to 2.541%, while the 30-year bond yield slipped 2.1 basis points to 3.043%.

The 10-year Italian government bond yield was up 18.4 basis points to 2.745%, while the 10-year German bond yield was down 3.9 basis points to 0.335%.

Bond prices move in the opposite direction of yields.

What's driving Treasurys?

Trade tensions simmered in the background after Federal Reserve Chairman Jerome Powell and ECB President Mario Draghi said Wednesday a trade war would hurt the global economic outlook on a central banking panel in Sintra, Portugal. German car maker Daimler, in a profit warning, said that tariffs on Chinese imports would have a knock-on impact on their bottom line. The announcement sent European shares lower , with the German DAX 30 index(DAX) down by more than 0.8%.

The return of concerns over tensions between Beijing and Washington, drew investors to the safety of government paper. That has helped counter the strong data and building price pressures in the U.S. economy.

The new coalition government in Italy appointed euroskeptic Alberto Bagnai as the head of the Finance Committee in the upper house of the Senate and Claudio Borghi as the head of the budget committee in the lower house of parliament. Borghi has railed against austerity and balanced-budget policies, and has previously called for the issuance of short-term government bonds, or mini-bots, which some have read as the beginnings of a parallel currency, threatening the euro .

What are market participants saying?

"Given the twin pressures of strong growth and imminent price rises (tariffs will do that, for sure), the main thing anchoring yields is concern about the global economy. And if U.S. equities aren't worried about that, why should the Treasury market be? Presumably the next step is to take yields and the dollar up as much as it takes to cause as much volatility in financial markets (EM, credit) as it takes to impact the U.S. equity market," wrote Kit Juckes, chief fixed-income strategist for Société Générale.

"News that two euroskeptic lawmakers from the League have been named to head key economic committees in Italy is serving as a reminder that the political backdrop in Europe is becoming increasingly murky," said David Rosenberg, chief economist for Gluskin Sheff, in a note.

What data is on investors' radar?

The Philadelphia Fed manufacturing index slowed to 19.9 in June from 34.4 in May , a 19-month low. Initial jobless claims for the week of June 16 fell by 3,000 to 218,000, suggesting the labor market remains tight.

Stocks mentioned in the article
ChangeLast1st jan.
DAIMLER 1.36% 58.57 Delayed Quote.-17.71%
DAX 0.82% 12742.33 Delayed Quote.-1.17%
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