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Bond Report: Global bonds whipsawed as Italian political woes sparks flight to safety

U.S. Treasury bond yields trade mixed on Friday with Matteo Salvini, far-right leader of Italy’s League party calling for early elections, triggering a run for safety in government paper outside of the third-largest economy in the eurozone. Read More...

U.S. Treasury bond yields were mixed on Friday with Matteo Salvini’s, far-right leader of Italy’s League party, calling for early elections, triggering a run for safety in government debt outside of the third-largest economy in the eurozone.

Salvini’s League party published a statement on Thursday complaining about tensions with its governing partner, the 5 Star Movement. Separately, Bloomberg reported that Salvini had sent a letter to the country’s prime minister, Giuseppe Conte.

The 10-year Italian bond TMBMKIT-10Y, +18.29%  was yielding 1.812%, surging 27.4 basis points, while comparable German bonds headed toward historic lows at minus 0.58%, representing a 2.358 percentage-point differential between the European government bonds, the widest margin in more than a month.

Investors tend to turn to German paper, the largest economy in the eurozone, during worries about the health of the region and a breakdown of Italy’s government. Italy’s banking system has long been a source of concern for investors because it is considered fragile compared against its eurozone peers.

The flight to bonds initially put some downward pressure on U.S. yields in early trade, but they were mixed at midday.

The yield on the benchmark 10-year Treasury note TMUBMUSD10Y, +0.51%  fell half a basis point to 1.705%. The 2-year yield TMUBMUSD02Y, +1.21% edged 0.1 basis point higher at 1.616%, while the 30-year Treasury bond yield TMUBMUSD30Y, -0.73%  slipped 1.4 basis points to 2.218%.

In earlier trade, the long-bond yield fell as low as 2.193%.

Even though U.S. bond yields have plunged lately, they still remain in positive territory, unlike much of the debt sold being sold by the world’s developed economies.

“Maybe there was a little bit of a backup in [U.S.] yields, given their significant move lower since late last week,” said Jon Duensing, director of investment grade credit at Amundi Pioneer, in an interview with MarketWatch.

“But on a day like today, there is demand for Treasurys and other risk-free assets.”

See: Global bond yields have fallen to 120-year low

Beyond worries about European politics, investors were watching developments between China and the U.S. on trade issues.

On trade, President Donald Trump’s administration said it wasn’t ready to let U.S. companies resume doing business with Huawei Technologies Co. as Beijing has refused to purchase U.S. agricultural goods as a part of a tariff agreement, Bloomberg News reported (paywall).

U.S. stocks slid Friday morning after Trump said that scheduled trade talks with China for September could be canceled, sending the Dow Jones Industrial Average DJIA, -0.37%,  the S&P 500 index SPX, -0.65%, as well as Nasdaq Composite Index COMP, -0.99%  sharply lower.

Read: Dow losses deepen as Trump raises possibility of canceling China trade talks set for September

Trump also called on the Federal Reserve to cut benchmark interest rates by a full percentage point, saying the U.S. economy was being “handcuffed” by the central bank’s monetary policy, while speaking with reporters at the White House.

Check out: Trump casts doubt on quick trade deal with China

“Volumes have been about average and price action whippy at the beginning of the session, as the U.S. is to hold off on Huawei licenses in response to China stopping crop-buying, triggering a risk-off response,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

On the economic data front, the U.S. producer-price index showed an 0.2% increase in wholesale prices in July, matching economist forecasts, but at a flat yearly rate of 1.7%.

Inflation has been stubbornly low inside and outside the U.S., providing the Federal Reserve cause to consider reducing benchmark borrowing costs further.

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