Italy's 10-year bond yields hit new record low on hopes for Draghi govt

Italy's 10-year bond yield hit new record low on Friday, pushing the closely watched gap over German Bund yields to its lowest since early 2015, as Mario Draghi looked set to take office as Italian prime minister.

Italy's 10-year bond yield hit new record low on Friday, pushing the closely watched gap over German Bund yields to its lowest since early 2015, as Mario Draghi looked set to take office as Italian prime minister. Indicated borrowing costs for Italy have dropped 20 basis points since the start of February. If sustained, that would mark the biggest monthly fall since September.

Having secured the endorsement of almost all Italy's political parties, former European Central Bank chief Draghi is likely to present his list of ministers to President Sergio Mattarella on Friday and unveil his policy programme next week in parliament. Italian bond yields, which have fallen sharply since Draghi was asked to form a new government last week, remained on a strong footing.

Ten-year yields hit a new all-time low of 0.426% and were last down 1.8 basis points on the day at 0.442%. The closely-watched Italian/German 10-year yield spread was trading around 90 basis points, after touching its lowest level since early 2015 and having narrowed 26 bps this month. The 30-year bond yield was down 3 bps on the day at 1.384%, not far off an all-time low at 1.37%. Its gap over German peers was around 135 bps, close to its lowest levels since 2016.

"We see the 30-year spread between Italian and German bond yields diving below 120 bps in the next couple of weeks," said Saxo Bank fixed income strategist Althea Spinozzi. "Spread compression will continue until the differential between 10- and 30-year spreads will level out, as happened at the end of 2009."

Reflecting reduced risks of holding Italian debt, Rome also saw its spread with Spain narrowing to around 30 bps, after hitting its lowest level since December 2017 on Thursday. The sharp fall in borrowing costs also fuelled market speculation that Italy could take advantage of the favourable backdrop to issue ultra-long debt.

"Given the prevalent optimism surrounding Italy, in particular long end (euro area) rates could see continued steepening pressure as Italy could seize the opportunity to launch a new (ultra) long bond this month," ING strategists wrote in a report. European Commission Vice President Valdis Dombrovskis said on Friday he was confident a Draghi-led government would successfully complete the remaining steps for funds from the Recovery Fund to be released quickly.

With a light data calendar on Friday and many markets in Asia closed for the Lunar New Year holiday, trade across financial markets was subdued. Core euro zone bonds yields edged lower. "Risk sentiment should remain supported, but the upside to rates is dampened as the Lunar New Year also curbs the prospects for primary market activities," ING strategists added.

Germany's 10-year bond yield was down 0.8 bps at -0.465%, off Thursday's one-week low at -0.474%.

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