UPDATE 2-German yield spread tightest since 2017 as U.S. curve flattens
Relief over a pause in the trade war between the U.S. and China has given way to doubt over whether the two countries can resolve differences.
The drop in the two-to-10-year U.S. Treasury yield curve to its flattest in more than a decade – at 13 basis points early on Tuesday - was a reminder of the future economic slowdown and recession fears regardless of a breakthrough on trade.
Yields on short-dated U.S. Treasury notes rose above five-year borrowing costs on Monday for the first time in more than a decade.
"The number one driver for global risk sentiment is the U.S.-China trade talks, which suddenly don't look as promising as they did over the weekend," Commerzbank strategist Christoph Rieger said.
"What sounds good at the dinner table becomes rather difficult at the negotiating table - the market now knows how to read Trump, he knows how to create big news at bilateral meetings but then when it comes to the nitty gritty it can be a very different story," he said.
Germany's 10-year bond yield fell to its lowest in four and a half months at 0.279 percent and was hovering around 2.89 percent at 1200 GMT.
German 10-year yields are also being pushed down by domestic concerns, Commerzbank's Rieger said, with European growth indicators sagging and Italian political concerns rumbling on in the background.
Data on Monday showed euro zone manufacturing expanded at its weakest rate in over two years in November, more evidence that the bloc's economic growth is past its peak.
Meanwhile, Italian Prime Minister Giuseppe Conte will present a new budget proposal in the next few hours, he told the newspaper Avvenire, aiming to avoid a disciplinary procedure by Brussels.
Italian yields have dropped in recent days on hopes that Italy will reach a compromise with the EU on its budget.
Yields across the Italian curve were higher early on Tuesday but still close to Monday's two-month lows. (Reporting by Abhinav Ramnarayan; editing by Ed Osmond, Larry King)
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