Italy's yields fall ahead of ECB key meeting

Benchmark Italian yields fell on Monday after reports that the European Central Bank was discussing a new bond-buying programme ahead of a meeting this week at which inflation is expected to be in the spotlight. After Italian 10-year bond yields posted their biggest weekly rise since March 2020, they fell 4 basis points (bps) to 3.37% on Monday, down from the November 2018 high of 3.414% touched on Friday.

Benchmark Italian yields fell on Monday after reports that the European Central Bank was discussing a new bond-buying program ahead of a meeting this week at which inflation is expected to be in the spotlight.

After Italian 10-year bond yields posted their biggest weekly rise since March 2020, they fell 4 basis points (bps) to 3.37% on Monday, down from the November 2018 high of 3.414% touched on Friday. A report that the ECB was set to strengthen its commitment to propping up vulnerable member states' debt markets if they were hit by a bond sell-off encouraged some trading volatility.

According to a Financial Times article citing no named sources, the ECB is preparing a proposal to create a new bond-buying program if needed to help countries facing rising borrowing costs, such as Italy. "Italian bonds are caught between two opposite forces: they widened last week, almost mechanically, as more hawkish ECB expectations set in, only to tighten this morning on the back of that FT article saying the ECB is getting closer to (agreeing) on a sovereign spreads management facility," said Antoine Bouvet, senior rates strategist at ING.

"Whether today's tightening can be sustained depends on how specific the ECB will be this week. I'm not holding my breath but even a firm commitment to put in place such a facility, without giving details, would be helpful." Investors have ramped up their bets on 2022 ECB interest rate rises since the announcement of May's record 8.1% eurozone inflation rate.

On Monday, money markets priced in 133 bps of hikes by year-end and were pricing in a bigger, 50 basis-point hike at one of the bank's policy meetings. Germany's 10-year yield, the benchmark for the bloc, was close to the 2014 highs touched on Friday, up 2 bps at 1.28%

The yield spread between 10-year Italian and German bonds widened to 208 bps, after recording the highest spread in two years last week.