UPDATE 2-Italian, Greek government bonds outperform, brush aside weak risk appetite

Italian and Greek government bonds - the riskier assets in the eurozone government bond market - strongly outperformed their peers on Monday, brushing aside waning risk appetite across global markets. The outperformance gave Greek 10-year bonds their best day since September and Italian 10-year bonds enjoyed their best for three weeks. This followed a Southern European debt sell-off in November when investors sought to lock in stellar profits from these markets ahead of year-end, when volumes tend to thin. Monday's moves came as global equity markets were down marginally after Chinese export data highlighted the economic damage from the 17-month-long trade war with the United States and refocused attention on a crucial Dec. 15 tariff deadline. Bonds from Italy and Greece would usually not be expected to underperform on days where investors shun risk assets.

Greece's 10-year bond yield fell 14 bps to 1.42%, the lowest level since late November, while Italy's 10-year bond yield fell 7 bps to 1.38%. Spain and Portugal - the better rated Southern European bonds - saw yields fall around 4 basis points.

"It goes against what had been happening for much of the day in equity markets, so it looks to be more of a case of a reach for yield rather than anything that is strongly related to fundamentals," said Mizuho head of rates strategy Peter Chatwell. Chatwell added that low trading volumes going into year-end tend to exaggerate price moves and this particularly affects Greece's small bond market.

Higher-rated government bond yields were also lower but by a lot less, falling around 1 bp. Germany's exports rose unexpectedly in October, a morale boost for Europe's largest economy, but had little impact on the region's bonds.

Disappointing data last week, including weak industrial production, painted a mixed picture of the German economy, which has been on the brink of recession but had shown recent signs of optimism. Analysts said attention was turning to the European Central Bank's first policy meeting led by Christine Lagarde on Thursday and any possibility of a dovish tilt under her leadership.

"Markets are broadly in a wait-and-watch mode before the events this week," said Daniel Lenz, a rates strategist at DZ Bank. Lagarde is expected to signal a commitment to the ECB's recent stimulus package, with no major policy changes.

Mark Holman, a partner at TwentyFour Asset Management, expects a 10 bps rate cut from the ECB next year, pushing German 10-year yields to -0.40% amid reluctance by eurozone banks to pass on negative rates to end-users. "We do think this reluctance will be questioned more and more the longer rates are below zero, but until negative rates are widely passed on, the ECB’s effectiveness to deal with future downturns is materially weakened," Holman said.

The Fed is also expected to hold fire on Wednesday. Futures markets foresee no change in policy interest rates.

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