Italy's 10-year yield drops to three-week low

It was last trading around 3.8%, little changed on the day. That Friday drop, which was seen across European government bonds, was a result, said analysts at Rabobank, of European Central Bank (ECB) President Christine Lagarde saying fourth quarter wage numbers were "obviously encouraging" in the ECB's efforts to bring down inflation.

Italy's 10-year yield dropped to its lowest in three weeks on Monday and its gap to the Germans 10-year yield was at its narrowest in nearly two years at the start of a busy week with U.S. and European inflation data both due. Italy's 10 year BTP yield dipped 2.5 basis points (bps) to 3.78% in early trading, its lowest since Feb. 5 and adding to an over 10 bps fall on Friday. It was last trading around 3.8%, little changed on the day.

That Friday drop, which was seen across European government bonds, was a result, said analysts at Rabobank, of European Central Bank (ECB) President Christine Lagarde saying fourth quarter wage numbers were "obviously encouraging" in the ECB's efforts to bring down inflation. Government bond markets are very much driven at present by changing expectations of when central banks will begin cutting interest rates.

A 25 bps ECB rate hike at its June meeting is near fully priced, though markets no longer see a cut in April as likely, as they had done earlier in the year. Germany's 10 year-yield, which dropped 7 bps on Friday, and managed just its second weekly fall of 2024, was steady on Monday at 2.37%.

That meant the gap between Italy and Germany's 10-year yields reached 140.3 bps in early trading, its tightest since March 2022. Italian economic data has held up reasonably well this year so far, and investors are also watching the outcome of this week's issuance of a bond reserved for retail investors - a BTP Valore bond.

"We anticipate that the demand for the third BTP Valore issue next week will remain high resulting in tighter BTP spreads," said UBS analysts in a note. "We do not anticipate any immediate political event in Italy that could increase pressure on BTPs," the analysts said.

The big scheduled data releases for European markets this week are February flash inflation data due in France and Germany on Thursday, with the Euro zone on Friday. The Federal Reserve's favoured measure of inflation, the core personal consumption expenditures (PCE) price index, is due on Thursday and forecasts are for a rise of 0.4%, though not long ago investors were hoping for a 0.2% increase.

Both sets of inflation data will be important for markets' assessment of how soon central banks will cut interest rates. European bond markets are currently highly sensitive to U.S. rate expectations as well as European.