Italian bond yields have best month since January; eyes on ECB

Italy's bond yields posted their biggest monthly fall in four months in May, boosted by the likelihood the country will get grants from the European Union to support its coronavirus-hit economy. The country's 10-year yield fell 29 basis points in May , the biggest monthly fall since January. They remained at near two-month lows early Monday, down 3 bps to 1.46%.

"The two most important factors behind this rally were the French-German EU recovery fund proposal, which was followed by the European Commission's `New Generation EU' tender last week, and repeated pledges by various ECB representatives to apply capital keys in a highly flexible manner when carrying out the pandemic emergency purchase program," UniCredit analysts told clients, referring to the way the bank allocates asset purchases among member states. If approved, the EU proposal would offer 500 billion euros of grants to benefit the worst-hit economies like Italy, using EU bonds that wouldn't count towards that country's debt. The European Central Bank's emergency purchases have been a key factor holding down Italy's borrowing costs.

Much focus on Monday was on the upcoming ECB meeting on Thursday, where markets expect an increase in its bond-buying programmes, probably by 500 billion euros. "The ECB Council meeting dominates the week and will be most important for spreads," Commerzbank analysts told clients, referring to bonds from the likes of Italy that pay a premium over Germany's.

Safe-haven German 10-year bond yields rose 3 bps to -0.42%, echoing risk-on moves in stock markets, which focused on the opening up of economies, with relief from the United States, which left the China trade deal intact.

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