Italian debt set for best weekly performance since 2019

In the euro zone, Germany's 10-year yield, the bloc's benchmark, dropped 22 basis points (bps) this week, set for its best weekly performance since the first week of March.

Eurozone bond yields rose on Friday but were set for big weekly falls, with benchmark Italian debt seeing its best weekly performance since 2019. After sharp rises across March and April driven by a repricing of rate hike expectations from central banks including the ECB, which are expected to act more aggressively to combat inflation, bond yields showed a remarkable turnaround this week across markets.

Yields fell sharply as stock markets sold off, a sign for analysts that growth concerns have returned to the forefront of investors' minds. In the eurozone, Germany's 10-year yield, the bloc's benchmark, dropped 22 basis points (bps) this week, set for its best weekly performance since the first week of March. Bond yields move inversely with prices.

But yields on Italian debt, among the key beneficiaries of ECB stimulus, dropped the most. The 10-year yield, having risen to 3.23% on Monday, was at 2.79% on Friday. Down 36 bps this week, they were set for their best weekly performance since August 2019

The closely watched premium over German 10-year yields fell to 185 bps, from over 200 bps earlier in the week, which had been the highest since May 2020. "That's mainly a positioning-led to move and people getting caught a bit short with widening being quite the consensus trade," said Peter McCallum, rates strategist at Mizuho.

The moves in Italian debt came as investors reduced their bets on ECB rate hikes this year, with money markets now pricing in around 83 bps of hikes by year-end, compared to 95 bps at the start of the week. "When we speak with clients, (Italy) is still a major concern with them, especially with the ECB ending net (asset purchases) and what comes next. I think people are cautious about what could happen," McCallum added.

On Friday, bond yields edged higher, with most 10-year yields in the bloc up 5-7 bps. Germany's 10-year yield was at 0.89%. "We had massive moves in Gilts and Bunds yesterday. Given that wasn't really on too much newsflow I think it's natural that we open a little bit higher today in yields," McCallum at Mizuho said.

 

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