2018.05.2921:05:00UTC+00Treasury Yields Rally as Italy Political Fears Stoke Demand for Safe-Haven Assets

U.S. government bonds rallied on Tuesday, driving down yields, as political chaos in Italy and Spain jolted through global financial markets, prompting demand for safe-haven assets such as U.S. and German government bonds.

Italian bonds markets saw a significant selloff, driving up yields on concerns of a new general election that could operatively turn into a referendum on the euro. Meanwhile, Spanish bonds were also pressured before a confidence vote later this week on Prime Minister Mariano Rajoy.

Markets were focused on Italy, where the yield on the two-year Italian government bond surged 189.4 basis points or 1.894 percentage points to 2.652 percent, notching its biggest single-day increase since 1992. The yield on the 10-year bond increased 51.8 basis points to 3.192 percent yields and bond prices move in opposite directions.

The yield on Spain's 10-year bond edged up 14.8 basis points to 1.669 percent.

German government bonds rallied. The yield on the 10-year bond or bund declined 7.7 basis points t 0.265 percent. The spread between German yields and the yields of Italy and other so-called peripheral eurozone nations widened significantly.

Meanwhile, U.S. Treasury yields also declined as investors flocked to safe-haven assets, with the yield on the benchmark 10-year note edging down 15.9 basis points to 2.772 percent, the biggest one-day fall since June 24, 2016, the day after Britain's vote to withdraw from the European Union.

The two-year yield fell 16.1 basis points at 2.319 percent, the biggest one-day fall since March 2010. The yield on the 30-year Treasury bond, edged down 12.1 basis points to 2.71 percent, the biggest one-day decline since June 2016.

The chaos in financial markets comes after Italian President Sergio Mattarella on Sunday stopped two anti establishment parties, the 5 Star Movement and the League, from establishing a government after vetoing their eurosceptic candidate for economic minister. Mattarella then asked former IMF official Carlo Cottarelli to attempt to form a new government. If he fails to secure a confidence vote in parliament for his new government, a new election could be in the cards as early in autumn, which can be perceived as a referendum on the euro.