Italy's bond market set for best week in over a year

Italy's government bond yields were set on Friday for their best week in over a year thanks to heightened expectations of European Central Bank monetary easing soon and relief that Rome has avoided EU disciplinary action over its fiscal position. As bond yields across the euro area this week hit fresh milestones, Italy delivered its own eye-popping moves.

Italy's 10-year bond yield has slid 45 basis points and is set for its biggest weekly fall since June 2018. It was 4 basis points lower on the day at 1.63% on Friday, having hit its lowest since 2016 on Thursday.

The closely-watched gap over safer German government bond yields is hovering around 200 bps and close to its tightest in over a year. Two-year Italian bond yields, down 3 bps on Friday at 0.03%, briefly turned negative earlier in the week.

Italy dodged the threat of EU disciplinary action over its public finances on Wednesday after persuading the European Commission that new measures submitted this week would help bring its growing debt into line with EU fiscal rules. "Some of the concerns investors have had around Italy have not played out yet," said Mohammed Kazmi, portfolio manager for UBP in Geneva.

"For now, the markets are reacting to expectations of ECB quantitative easing and Italy has always been one of the main beneficiaries of that." For sure, speculation that the ECB could deliver not only interest-rate cuts but possibly a fresh round of monetary stimulus was fuelled this week by comments from ECB officials.

Investors are also betting that France's Christine Lagarde, picked by EU leaders this week to be next ECB chief, will double down on the ECB's dovish monetary policy stance. Data on Friday showing German industrial orders fell far more than expected in May reinforced those expectations.

Most 10-year bond yields in the bloc were little changed on the day as markets awaited key U.S. jobs data later in the session. Germany's 10-year bond yield hovered around minus 0.40 %, having dropped below the ECB's deposit rate on Thursday for the first time.

 

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