Italian 10-year bonds set for best month since January

Italian 10-year bond yields were set on Friday for their biggest monthly drop since January, with demand for the paper boosted by the recovery fund agreed by the European Union last week. Italy's 10-year yield dropped 30 basis points in July to its lowest since early March, its biggest monthly fall since January.

Italian 10-year bond yields were set on Friday for their biggest monthly drop since January, with demand for the paper boosted by the recovery fund agreed by the European Union last week. The 750 billion-euro fund, part of which will be offered as grants to member states worst hit by the coronavirus, has been hailed as a game-changer for the euro zone.

That has boosted Italian debt, given concerns around the sustainability of the country's debt. Italy's 10-year yield dropped 30 basis points in July to its lowest since early March, its biggest monthly fall since January. That also dragged down the risk premium it pays over Germany for 10-year debt to March lows.

But safe-haven German government bonds also had a decent month, with yields set for their biggest monthly decline since April and their best weekly performance in seven weeks. Safe-haven bonds are likely to remain supported given the rise in coronavirus cases around the world, raising fears of new lockdowns.

"With periphery yields still falling to new lows since March, however, it seems that investors are treating periphery sovereigns as preferred pick-up havens in view of the EU and ECB support," Commerzbank's head of rates and credit research Christoph Rieger told clients, also referring to the European Central Bank's bond purchases. Declining risk appetite would usually lead to a rise in the yields of riskier bonds such as Italy's.

Data releases remained the focus on Friday. The euro zone's economy recorded its deepest contraction on record in the second quarter, preliminary estimates showed.

As that followed data on Thursday that revealed a record contraction in Germany - the region's leading economy - and sent Bund yields to two-and-a-half-month lows, there was little reaction on Friday to the euro zone estimates. But the euro zone's inflation unexpectedly ticked up in July, supporting ECB expectations that a negative headline reading might be avoided.

"That's more positive than we thought, but I still think it's the same as GDP yesterday. At this point I don't think there's much faith in the consensus numbers, so it matters more what the general message is," said Mizuho strategist Peter McCallum. "This gives off the message that inflation is very low... it doesn't change the picture too much."

German 10-year yields were last down 1 basis point to -0.55%, holding near 2-1/2 month lows. Italian 10-year yields were unchanged at 1.03%, near their lowest since early March. Analysts said month-end index extensions, where funds rebalance their portfolios to reflect activity during the month, also supported bonds on Friday.

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