Italian yields rise further after ECB sell-off; PMIs awaited

Italian bonds underperformed their peers and their yields rose further on Friday, a day after a sell-off following the European Central Bank meeting, where the bank's message was perceived as more hawkish than expected.

Italian bonds underperformed their peers and their yields rose further on Friday, a day after a sell-off following the European Central Bank meeting, where the bank's message was perceived as more hawkish than expected. The ECB maintained its highly accommodative monetary policy, but market participants saw the ECB as emphasizing it would not need to use all the firepower of its pandemic emergency bond purchases (PEPP) if favourable financing conditions can be maintained without exhausting the envelope.

Government bonds from Italy and Spain -- who rely on ECB purchases to keep a lid on their borrowing costs as they take on record levels of debt to fight the pandemic -- sold off heavily, pushing yields to their highest since early November. Italian bond yields rose further on Friday, with the 10-year benchmark yield up 4 basis points to 0.70% in early trade, touching its highest since early November.

The gap between Italy and Germany's 10-year yields -- effectively the risk premium on Italian debt -- rose to its highest since mid-November at 119 basis points, above levels touched last week during Rome's government turmoil. "It is a sensible reaction to reduce positions if you believe the ECB is less dovish and then test where the ECB steps in," said Sebastien Galy, senior macro strategist at Nordea Asset Management.

Spanish 10-year yields were up 2 basis points to 0.15%. Yields for higher-rated euro area governments like Germany were unchanged. Elsewhere, focus is on January first-estimate euro area business activity surveys, with French readings due at 0815 GMT, Germany at 0830 GMT, and finally euro area readings at 0900 GMT.

A Reuters poll expects the surveys to show euro area manufacturing growth slowed and a contraction in services accelerated, leaving the composite reading covering both to show overall activity had slowed further.

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