Treasuries outlook: Italy, Spain fears boost demand for US bonds

27 May, 2018

US Treasury yields fell to their lowest level in three weeks on Friday as concerns about Italy's new government and a leadership challenge in Spain boosted demand for low-risk debt. Italian Prime Minister-designate Giuseppe Conte began putting together his cabinet team on Thursday, with party leaders pushing for an 81-year eurosceptic economist to be given the post of economy minister.
Spain's Prime Minister Mariano Rajoy was threatened with two separate no-confidence motions on Friday, after a graft trial involving members of his party in which a judge questioned the credibility of his testimony. There is "continued unrest with some of the key core economies," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.
Geopolitical concerns have dominated in recent days. North Korea said on Friday it was still open to talks with the United States after President Donald Trump called off a summit with leader Kim Jong Un, saying it hoped the "Trump formula" could resolve the standoff over its nuclear weapons program.
Technical factors were also driving the bond rally, with benchmark 10-year note yields falling back from an almost seven-year high of 3.128 percent last week. "The Treasury market has essentially pulled back from a solid attempt to reprice to a higher yield plateau," Lyngen said. The 10-year notes gained 13/32 in price to yield 2.93 percent, down from 2.98 percent on Thursday. Month-end demand was also seen as boosting bonds.
Data on Friday showed that new orders for key US-made capital goods increased more than expected in April and shipments rebounded, suggesting business spending on equipment was picking up after slowing at the end of the first quarter. The bond market will close on Monday for the US Memorial Day holiday.

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