US Treasury yields fell on Tuesday as traders piled back into lower-risk government debt after Italy's new prime minister vowed to enact economic policies that could balloon the nation's already-heavy debt load. Traders lightened their Italian bonds in favor of Treasuries and German Bunds as Italian Prime Minister Giuseppe Conte's pledge for tax cuts and more welfare spending overshadowed encouraging business data on Italy and Spain, the euro zone's third- and fourth-largest economies.
"The market is just following Italian spreads as a gauge, but it seems to be settling down here," said Dan Mulholland, head of Treasury trading at Credit Agricole in New York.
At 1:46 p.m. EDT (1746 GMT), the yield on benchmark 10-year Treasury notes was 2.915 percent, down 2 basis points from late on Monday. It reached a one-week high of 2.946 percent the prior session due to reduced fears about political turmoil in Italy and Spain. Ten-year German yield fell 5 basis points to 0.369 percent, Reuters data showed.
On the other hand, 10-year Italian yield jumped 21 basis points to 2.773 percent after hitting a one-week low of 2.509 percent on Monday.
"We have to be mindful of political risks. Italy represents a material headwind for markets," said Bill Merz, head of fixed income research at US Bank Wealth Management in Minneapolis. Daily trading volume has fallen following the record high level of bond futures transacted a week ago, when traders rushed out their bearish bets against Treasuries on fears that Italy's anti-establishment parties would push the country to leave the euro zone.
Tuesday's buying of Treasuries was tempered ahead of the Treasury Department's announcement of next week's government debt auctions and the Federal Reserve's two-day policy meeting, analysts said.
An unexpected pickup among US service industries in May, according to the Institute for Supply Management, briefly trimmed buying in Treasuries earlier on Tuesday.
Interest rates futures implied traders saw a 92 percent chance the US central bank would raise overnight borrowing costs by a quarter point to 1.75-2.00 percent next Wednesday, CME Group's FedWatch program showed.
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