Euro zone bond yields fall, Italy's hit an all-time low

Euro zone borrowing costs fell on Thursday, with Italy's 10-year bond yield dropping to an all-time low, as global markets focused on a dovish Federal Reserve outlook after an unexpectedly soft reading on U.S. inflation. The European Commission, meanwhile, said the euro zone economy would rebound less than earlier expected from the coronavirus slump this year, adding that 2022 growth would be stronger than earlier thought.

Euro zone borrowing costs fell on Thursday, with Italy's 10-year bond yield dropping to an all-time low, as global markets focused on a dovish Federal Reserve outlook after an unexpectedly soft reading on U.S. inflation.

The European Commission, meanwhile, said the euro zone economy would rebound less than earlier expected from the coronavirus slump this year, adding that 2022 growth would be stronger than earlier thought. Germany's 10-year government bond yield was down 2.5 basis points at -0.463% after hitting a one-week low at -0.474%.

The benchmark 10-year U.S. Treasury yield fell to 1.14%, well off Monday's 1.2% peak, as U.S. inflation data on Wednesday missed expectations. Late on Wednesday, Federal Reserve Chairman Jerome Powell said he wanted to see inflation reach 2% or more before even thinking of tapering the bank's super-easy policies.

"A tame U.S. CPI print in January means markets don't have to worry about a hawkish Fed for now. A look at a broader set of indicators than just interest rates shows the reflation trade is alive and kicking. Risk appetite should continue to improve, pushed by ever-lower real rates," ING said in a note to clients. According to Saxo Bank fixed income strategist Althea Spinozzi, markets believe that lockdown measures and economic slowdown will be prolonged and that central banks will continue to be dovish.

"Today Germany's bonds yield fall was a rebound after a recent sell-off," she added. Italian bond yields hit new all-time lows after borrowing costs fell to new record depths at an auction on Thursday as Mario Draghi was expected to present his new government coalition in the next few days.

Italy's anti-establishment 5-Star Movement began voting on whether to support a cabinet led by Draghi, in what could be one of the final steps before a new government is formed. Italy's 10-year government bond yield was 4 basis points down, after hitting an all-time low at 0.461%.

The Italian/German 10-year yield spread was trading at 91.5 basis points, close to its lowest level in more than five years . "We are unlikely to witness a further fall in Italian bond yields over the next few weeks. But if Draghi gets EU leaders' support for his coalition government and its projects, we could see a further fall," said MFS fixed-income research analyst Annalisa Piazza.

Focus now turns to a reading on Americans filing applications for weekly unemployment benefits later in the day.