Treasurys rally as Italian fiscal jitters rattle markets
Treasury yields fell on Tuesday after the Italian governmentâs plan to ramp up fiscal spending came into focus, luring investors to the perceived safety of U.S. government paper.
The 10-year Treasury note yield TMUBMUSD10Y, -0.12% fell 2.2 basis point to 3.056%. The 2-year note yield TMUBMUSD02Y, +0.15% declined 0.8 basis point to 2.815%, while the 30-year bond yield TMUBMUSD30Y, -0.07% slipped 2.4 basis points to 3.206%. Bond prices rise as yields fall.
The 10-year German government bond yield TMBMKDE-10Y, +0.00% fell 6.1 basis points to 0.420%, while the 10-year Italian bond yield TMBMKIT-10Y, +0.00% climbed 19.2 basis points to 3.452%, its highest since March 2014, according to Tradeweb data.See Also
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Investors turned their attention to Italy over its coming budget proposal to 2019. The ruling coalition consisting of the antiestablishment 5 Star Movement and the far-right League parties have issued a budget deficit target of 2.4% of gross domestic product, threatening a clash between the government and the European Unionâs s trict fiscal rules. But analysts say the weakening economic backdrop may mean the target is overly optimistic.
Luigi Di Maio, deputy prime minister and head of the 5 Star Movement, saying he wouldnât budge from the proposed deficit target against the pressure from the EU. Jean-Claude Juncker, president of the European Commission, warned Italy not to proceed with its fiscal plans.
See: For Italy, the euro is âunrenouncable,â its prime minister reassures
âThere is a material risk that the actual outcome for the budget deficit in 2019 could turn out to be higher than the target. The cost of the increased spending and tax cuts seems to imply a bigger fiscal deterioration. In addition, the economic outlook for Italy has deteriorated in recent months and it is unclear whether the government has fully taken this on board in formulating its target for the budget deficit,â wrote Nick Kounis and Aline Schuiling of ABN Amro.
Traders sol d Italian government paper to the benefit of U.S. Treasurys, the traditional port of call during market turmoil. Treasury yields have climbed in recent weeks amid expectations for the Federal Reserve to hike more than expected next year, but their rise has been handicapped by the geopolitical tensions in Italy.
On the central bank front, Fed Chairman Jerome Powell said he couldnât find signs of inflation despite tightening labor markets. He disputed the validity of the Phillips curve, an economic framework connecting low unemployment rates with stronger price pressures, saying âhigher wage growth alone need not be inflationary.â
Read: Italyâs budget turmoil: Hereâs what it will take to rattle global markets
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