Italian, German bond yields tumble to fresh record lows

Italy's 10-year bond yield fell to a new record low on Tuesday on optimism that 5-Star members would approve a coalition deal with the Democratic Party, just as safe-haven German Bund yields fell to record lows on renewed political uncertainty in Britain. Members of 5-Star are holding a ballot on the party's internet platform from 0700 to 1600 GMT to decide whether the group should join forces with the PD, its traditional foe.

An SWG opinion poll for La7 television channel said 51% off 5-Star supporters backed a tie-up with the PD, while some 69% of PD voters endorsed the idea. Italy's 10-year bond yield fell below 0.90% for the first time, last down 6 basis points on the day, while the gap over safer German Bund yields tightened to around 161 bps.

Bonds were further supported when the two Italian parties unveiled a shared policy program on Tuesday to serve as the basis of a new coalition, putting an expansionary 2020 budget at the top of their agenda, but promising that it would not endanger public finances. "It looks like the market is betting on a yes in the online ballot of 5-Star members," said Luca Cazzulani, rates strategist at UniCredit. "We are a bit more cautious and if there is a no vote the market will be caught off guard."

Even heightened Brexit uncertainty and weak stock markets failed to dent demand for Italian bonds, which tend to move with other risk assets, thanks to reduced political uncertainty in Italy and heightened expectations for rate cuts and stimulus at next week's ECB meeting. Britain's lawmakers will decide on Tuesday whether to move one step closer to an early election when they vote on the first stage of their plan to block Prime Minister Boris Johnson from pursuing a no-deal Brexit.

UK 10-year gilt yields fell to a record low of 0.34 %, set for their biggest two-day fall since early July. That helped push Germany's benchmark 10-year bond yield to a fresh record low at -0.74%.

"Bund yields are being pulled lower by UK yields this week… as the UK is inching towards possible snap elections and [on the uncertainty of] when such a possible election would be," said KBC strategist Mathias van der Jeugt. Trade uncertainty is another factor supporting core yields, analysts said.

A lack of progress by the United States and China in scheduling talks in September is in focus. China said on Monday it lodged a complaint against the United States at the World Trade Organization over its import duties. Meanwhile, Austria's 10-year bond yield fell to a record low of -0.48% after the country sold 1 billion euros of five and 10-year bonds. .

Both bonds received orders of about 1.8-times the amounts sold, despite offering average yields of -0.798% and -0.494% respectively.

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