Italy's bond yields down 4-6 bps, outperform EZ peers

Italian government bond yields fell on Wednesday, with analysts citing a La Stampa article that Italy may try to secure help from the European Central Bank.

Italian government bond yields fell on Wednesday, with analysts citing a La Stampa article that Italy may try to secure help from the European Central Bank.

The newspaper said the government was worried by what might happen in September when it unveils new public spending targets. The budget, expected to contain welfare spending measures and tax cuts, will be approved by the cabinet late October and sent to the European Commission by Oct 31.

"If the ECB covers you, markets can't speculate because they don't make money," the paper cited a government source as saying. "And in this way, the rating agencies can't downgrade your debt," the source said.

Italy's bond market has faced selling pressure since a new anti-establishment coalition came to power in June, but appeared to draw some support on Wednesday from the La Stampa article.

Two-year yields were last down 7 basis points at 1.22 percent. Ten-year yields fell 3 bps to 3.15 percent, narrowing the gap over German Bund yields to 275 bps from 280 bps late on Tuesday.

"It seems like the move in Italian bonds is about this story," said Richard Maguire, head of rates strategy at Rabobank.

"But in terms of the likelihood of the ECB intervening to help Italy with QE (quantitative easing), the political hurdle for the ECB would be extremely high."

The paper said the ECB's protection could be a new quantitative easing programme.

Italy has been searching for allies to support its battered bond market in recent weeks, with the United States and China voicing little concern about a widening in Italy's bond yield spread over eurozone peers.

Italy's Economy Minister Giovanni Tria said on Tuesday that the Chinese government had no concerns about a recent widening of Italian yield spreads, following reports last week that U.S. President Donald Trump told Prime Minister Giuseppe Conte that the U.S. was ready to help Italy with its debt next year.

"At the end of the day the Italian government is looking for allies everywhere, they are cornered to some degree and eager to look for support," said DZ Bank rates strategist Christian Lenk.

Analysts were skeptical about the impact of the article, which they said lacked details.

They point out that if Italy wants assistance from the ECB, Rome would have to apply to the ECB's Outright Monetary Transactions (OMT) programme.

Under the OMT, the ECB could buy a country's short-term bonds in the secondary market. But Italy must be in a macroeconomic adjustment programme with strict lender supervision to qualify for the scheme.

Also, a monetary policy tool targeting a single country would not be in line with the ECB's mandate and so could be politically sensitive.

"The extension of ECB QE for Italian govvies is very unlikely," said Lenk.

Some traders in Italy said a successful auction of Italian T-bills on Wednesday may have helped sentiment, while others pointed to a covering of short positions after five days of straight yield rises.

Outside Italy, bond yields were marginally higher. Germany's 10-year bond yield was up 1 bps at 0.39 percent.

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