Euro zone bond yields rise on risk appetite, record-breaking Italian sale

Euro zone borrowing costs rose on Wednesday, as investors shed safe haven assets on encouraging economic data and a chunky Italian bond sale put pressure on the country's outstanding bonds. Demand for European government debt in general took a knock as world stocks vaulted to three-month highs after the Chinese services sector bounced back to growth and U.S. private payrolls fell by less than expected as lockdown restrictions eased globally.

Safe-haven German 10-year bond yields hit their highest since mid-April, last up 6 basis points to -0.35%. Italy's 10-year yields reached one-week highs at 1.56% as the country received record demand of 107 billion euros for a 14 billion euro government bond sale. Bond yields usually rise during a debt sale as investors sell outstanding bonds to make space for the new supply.

They are up 10 bps this week as analysts say they are vulnerable to profit-taking by investors following a rally in recent weeks since it became likely that Italy would receive European Union grants to help its coronavirus recovery. "We've liked the euro zone periphery again that's obviously rallied a lot so the risk-reward profile on the periphery is not as attractive as it was," said David Riley, chief investment strategist at BlueBay Asset Management.

He has reduced some holdings to take profits given the recent fall in the risk premium Italy pays over German debt. "Quite a lot of good news is priced in... but we know that there will be a lot of political resistance and pushback on the European Commission proposal from the so-called frugal four states. The market is also pricing in that there will be some increase in the PEPP. We think that's likely, but there is potential for disappointment," Riley added, referring to the European Central Bank's emergency bond purchases.

Focus remains on Thursday's ECB meeting, where consensus is that the bank will upsize bond purchases by 500 billion euros. "There is a clear willingness to tighten spreads by deviating from the capital key, which will help skew market reaction in favour of Italy and Spain if we are right in expecting a top-up of the PEPP (Pandemic Emergency Programme) tomorrow," ING senior rates strategist Antoine Bouvet said.

ECB data released on Tuesday showed the central bank scooped up all of Italy's new debt in April and May, a much larger share than Italy's usual share in the scheme.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)