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BOND REPORT : 2-year Treasury Yield Retreats To 15-month Low Amid Geopolitical Jitters And Soft Data

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05/15/2019 | 03:40pm EDT

By Sunny Oh

Treasury prices rose on Wednesday, pushing yields lower, after signs of weakness in the world's two largest economies and geopolitical concerns around Italy's fiscal deficits spurred inflows into haven assets like U.S. government paper.

What are markets doing?

The 10-year Treasury note yield fell 4.1 basis points to a six-week nadir of 2.380%, albeit after touching an intraday low at 2.361%, which represents the lowest level since Dec. 2017.

The 2-year note yield was down 3.7 basis points to 2.380%, its weakest since Feb. 2018, while the 30-year bond yield slipped 3.2 basis points to a six-week low of 2.823%. Debt prices move in the opposite direction of yields.

The German 10-year government bond yield fell 2.5 basis points to negative 0.099%, while the Italian 10-year yield rose 1.7 basis points to 2.748%.

What's driving Treasurys?

Italy's deputy Prime Minister Matteo Salvini said Italy could break the European Union's fiscal rules to increase employment in the sluggish economy. Investors are entertaining the possibility of a renewed clash between Rome and Brussels after the European Commission forecast Italy's deficit to GDP level would hit 2.5% in 2019 and 3.5% in 2020, which would eventually put it in breach of the EU's 3% fiscal ceiling.

Germany's economic minister Peter Altmaier underlined the gloomy economic backdrop even after the eurozone's largest economy grew 0.4% in the first-quarter (https://www.ft.com/content/a5526164-76d6-11e9-bbad-7c18c0ea0201), staving off fears of a recession.

Opinion: Wither the EU? Not so fast--there are plenty of reasons to be optimistic

China's retail sales rose 7.2% in April from a year earlier, but represented the slowest pace of growth since 2003 . Economists said slowing consumer activity underlined the need for additional fiscal stimulus beyond what Beijing had injected into the Chinese economy earlier this year.

Bond-market bulls also were buoyed by fresh signs of economic weakness. U.S. retail sales fell 0.2% in April , below analysts' expectations for an 0.1% increase. Industrial production fell 0.5% in April , a sharper drop than the 0.1% fall that economists had anticipated.

What did market participants say?

"Higher [bond] prices took place as Italian Deputy Premier indicated he's prepared to break EU fiscal limits and German Economy Minister says economy is still in a weak phase," said Tom di Galoma, managing director of Seaport Global Securities, who said investors should anticipate lower yields in the face of increased geopolitical concerns.

"[The drop in industrial production] is the latest report to confirm U.S. growth has downshifted meaningfully from last year. A combination of slowing growth in China, and U.S.-China trade tensions, which contributed to a run-up in inventories, are factors currently weighing on IP growth. We don't expect a quick rebound," wrote Tiffany Wilding, U.S. economist for Pimco.

What else is on investors' radar?

Investors kept an eye on trade developments. News reports suggested Trump was contemplating a six-month delay on tariffs on cars imported from the European Union. The White House's deadline to decide on the tariffs had been May 18.

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