Bonds Rise on Italy Election Fears, Sour US Data

Bonds Rise on Italy Election Fears, Sour US Data

U.S. Treasurys rose on Wednesday, as Italy’s political deadlock and a sharp drop in U.S. durable goods orders sparked demand for safe-haven government debt.

Overall orders for durable goods tumbled 5.2 percent as demand for civilian and defense aircraft fell sharply. Still, non-defense capital goods orders jumped by 6.3 percent, its biggest gain since December 2011.

Bonds were also helped by Federal Reserve chairman Ben Bernake, who on Tuesday reaffirmed the central bank’s commitment to monetary stimulus.

The yield on 10-year notes fell to 1.852 percent, from around 1.883 percent in late U.S. trade. It had fallen to as low as 1.836 percent on Tuesday, its lowest level in over a month. Thirty year bond yields also fell, to 3.042 percent.

(Read More: Italy Debt Auction to Show Cost of Political Crisis)

The benchmark 10-year yield has decisively broken below its trading range around two percent during the past month after Italy’s elections triggered fears that political paralysis in the country could reignite the debt crisis in the euro zone.

“The market isn’t trying to price in a European crisis like the one we saw last year. Still, what it is doing now is to recalibrate risk and to price in some of that risk,” said Tomoaki Shishido, fixed income analyst at Nomura Securities.

(Read More: Italy Parties Seek Way Out of Election Stalemate)

U.S. bonds could gain if Italy is forced to pay far higher borrowing costs than before the election, when it sells longer-dated bonds on Wednesday.

Treasuries got a modest boost after Bernanke strongly defended the Fed’s bond-buying stimulus, easing some speculation that the Fed is inching towards wrapping up its big bond buying scheme as soon as the middle of this year.

While Bernanke acknowledged the risks from the U.S. central bank’s bond purchases, which have ballooned its balance sheet to more than $ 3 trillion, he said the Fed has the ability to manage these risks.

(Read More: Fed’s Bernanke Stays the Course)

Investors are also looking to $ 85 billion in automatic, across-the board spending cuts due to come into force on Friday unless lawmakers reach a budget deal to avoid them.

While worries that spending cuts would hurt the still-fragile U.S. economy are likely to support Treasuries, Nomura’s Shishido said the initial market response may be muted given that its impact will be spread out over a long period.

“It’s not like a government shutdown. Even if spending cuts start, the government can’t cut staff on day one. It will take some time. So the market may be able to react only when its impact start to show up in economic data, perhaps in late April at the earliest,” he said.

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