Italian yields hit their lowest since March, focus on new COVID-19 cases

Italian 10-year bond yields hit their lowest since late March on Monday, a move analysts said underscored continued support from the European Central Bank, despite general risk aversion among investors due to fears of a second wave of coronavirus cases.

Italian 10-year bond yields hit their lowest since late March on Monday, a move analysts said underscored continued support from the European Central Bank, despite general risk aversion among investors due to fears of a second wave of coronavirus cases. Chinese economic data disappointed and Beijing reported its second consecutive day of record new numbers of COVID-19 cases on Monday, all linked to a major wholesale food market.

That adds to investor fears over a spike in cases in the United States, where several states have reported a record number of new cases in recent days, souring optimism across global markets that had been partly fuelled by a gradual lifting of lockdowns implemented to curb the spread of the virus. Stocks took another hit on Monday, while safe-haven bonds benefited, echoing moves last week when fears first came to the forefront.

"People have realized again that there are a lot of risks remaining and that we will not have a V-shaped recovery from an economic point of view," said DZ Bank strategist Daniel Lenz. Despite the risk aversion in markets, Italian bonds, usually deemed risk assets, outperformed. Ten-year yields fell to their lowest since late March, last down 4 basis points to 1.38%. Two-year yields fell 7 bps to 0.16%, their lowest since early March.

While Italian yields initially rose after a sell-off following large bond sales from several lower-rated eurozone states last week, they have been falling since later in the week despite the second wave fears. "What stands out is that there's not so much spread widening in the periphery," DZ Bank's Lenz said.

He attributed this to flexibility in the European Central Bank's emergency bond purchases that have allowed it to focus on buying on Italy. After seeing its biggest weekly rise in eight weeks last week, the risk premium Italy pays for 10-year debt on top of Germany narrowed on Monday to 182 bps.

Germany's 10-year bond yield was last down 1 basis point at -0.45% after registering its best week since February last week when it fell 18 bps. Italy's government will decide by July whether to ask for a loan from the eurozone bailout fund, various newspapers reported over the weekend.

Germany's new borrowing will rise to 218 billion euros this year, Bild newspaper reported. Public trust in the ECB appears to have dropped more than in other governing institutions over the past decade, a new ECB paper said.