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While bond yields across the euro area this week hit fresh
milestones, Italy delivered eye-popping moves of its own with
10-year borrowing costs falling to their lowest since 2016.
Best week for Italian bonds in over a year: https://tmsnrt.rs/2FSYhZh
Italy on Wednesday dodged the threat of EU disciplinary action
over its public finances after persuading the European
Commission that new measures submitted would help bring its
growing debt into line with EU fiscal rules.
Speculation that the ECB could deliver not only interest-rate
cuts but possibly a fresh round of monetary stimulus were fueled
this week by ECB officials, pushing euro zone bond yields down
further.
Investors are also betting that France's Christine Lagarde,
picked by EU leaders this week to be next ECB chief, will double
down on a dovish monetary policy stance.
"The ECB plays a considerable role for the move in Italian bonds
this week, but also there's the fact that we've had some
positive headlines on the budget deficit," said Ross Hutchison,
a fund manager at Aberdeen Standard Investments.
With more than half of the of the euro zone government bond
universe in negative yield territory, investors piled into
positive-yielding Italian bonds, known as BTPs.
Italy's 10-year bond yield, down a basis point on Friday at
1.66% <IT10YT=RR>, has slid around 45 basis points this week --
set for its biggest weekly decline since June 2018.
That slide is more than double the falls seen in other major
government bond yields.
Interactive version of this chart: https://tmsnrt.rs/2FV7gca
The euro zone's economic slowdown is no longer temporary, and
the ECB needs to provide more stimulus to fulfil its mandate,
Governing Council member Olli Rehn told German newspaper Boersen
Zeitung.
"For now, the markets are reacting to expectations of ECB
quantitative easing and Italy has always been one of the main
beneficiaries of that," said Mohammed Kazmi, portfolio manager
for UBP in Geneva.
Two-year Italian bond yields, steady on Friday at 0.06%, briefly
turned negative earlier in the week <IT2YT=RR>.
The closely-watched Italian/German 10-year bond yield gap is
hovering around 200 bps, near its tightest in over a year
<DE10IT10=RR>.
"Spread levels below 200 bps look hardly sustainable beyond the
medium term," said Benjamin Schroeder, senior rates strategist
at ING. "Eventually, we think the current government will clash
with the EU over the 2020 budget in autumn at the latest."
Most 10-year bond yields in the bloc inched higher but trade was
subdued ahead of key U.S. jobs data later. Germany's 10-year
bond yield was at minus 0.39% <DE10YT=RR>, having dropped below
the ECB's minus 0.40% deposit rate on Thursday for the first
time.
Greek yields edged up <GR10YT=RR> before elections this weekend.
Opinion polls suggest the opposition conservatives are likely to
ride a wave of anger over continuing austerity measures and
seize power.
(Reporting by Dhara Ranasinghe; Editing by Catherine Evans and
Alexander Smith)
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