Treasuries Lead European Bonds Higher as Trump's Woes Mount

  • U.S. 10-year yield may decline to 1.75% in ‘autumn,’ SMBC says
  • European bond yields fall as risk-off sentiment spreads

Treasuries rose for a second day to drag European bonds higher, as risk-off sentiment spread amid the latest U.S. political turmoil and signs that the world’s biggest economy is losing momentum.

Benchmark 10-year yields fell to the lowest in two weeks following reports that President Donald Trump asked the FBI director to drop an investigation into a former security adviser and disclosed allegedly classified information to Russian officials. That also pushed down the yields on 10-year German bunds and U.K. gilts.

A Bloomberg index of whether U.S. economic data is exceeding or trailing forecasts slid to a three-month low after a report Friday showed core inflation slowed.

“With the shaky investor confidence in the U.S. inflation outlook, political turmoil is seen as a negative” for risk sentiment, said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp. in Tokyo. “Markets have just started to price out future Fed rate hikes and are likely to focus on weak U.S. data from here on.”

Overnight index swaps show there’s a 79 percent chance the Federal Reserve will raise its benchmark rate in June, down from a 96 percent probability on May 11, the day before the inflation data was published.

The Treasury 10-year yield fell four basis points to 2.29 percent after dropping to 2.28 percent, the lowest level since May 3, according to Bloomberg Bond Trader data.

The benchmark yield may fall to 1.75 percent in “autumn,” which would put it back where it was during the U.S. presidential election in November, Sumitomo Mitsui’s Uno said. A decline to that level by the autumn equinox on Sept. 22 would generate a 5.6 percent return for investors who buy Wednesday, according to data compiled by Bloomberg.

German 10-year yields fell three basis points to 0.40 percent, the lowest this week, as of 8:55 a.m. in London. Their U.K. counterparts also fell three basis points to 1.10 percent, while Italian 10-year bond yields fell as much as four basis points to 2.20 percent, their lowest in nearly two weeks.

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