Finance Hub

Rates Spark: Treasuries Out of Favour

Authors: Benjamin Schroeder, Michiel Tukker, Padhraic Garvey, CFA

US Treasuries remain under pressure. It's not a “Sell America” thing, as no coincident dollar weakness. It's more based on the latest assessment of fundamentals. If this signals a broader trend of diversifying away from the US, even markets like Italy stand to benefit. The 10y Italy/Bund spread just marked its tightest levels since 2021.

US 10yr Breaks Above 4.5% Again

Since the weekend agreement with China, sentiment has turned bearish on Treasuries. Recession risks have eased, and risk assets are in favor. Mutual funds have been setting short duration strategies, and a move up in yields was overdue. Fiscal concerns and potential tax cuts continue to weigh on the market. In the past five trading days, the 10-year yield is up about 25 basis points. This is seen as a fair reflection of fundamentals, not a broad “Sell America” move.

Bunds and Italian Bonds Benefit from Foreign Interest

The 10-year spread of Italian government bonds over German Bunds hit 100bp, its tightest since 2021. Improved risk sentiment and de-escalation on the trade front have helped, with Italy seeing better-than-expected demand from foreign investors. Recent data shows higher inflows into Italian government debt, and the Italian treasury may reconsider its funding mix as foreign demand grows.

Italy’s strategy has also focused on domestic retail investors, with debt instruments tailored to this group now surpassing treasury bills. The next retail BTP-Italia bond is planned for later this month. With foreigners making a comeback, spreads may remain supported even at tight levels.

Market Events to Watch

• US: Retail sales data, weekly jobless claims, PPI, and industrial production figures.
• Fed: Powell speaks on monetary policy; Barr at a small business symposium.
• Eurozone: Industrial production data and Q1 GDP second reading; ECB officials to speak.
• UK: 3-year gilt auction for £2bn.

Source: ING, ECB