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Italian bonds outshine flat market as peers digest Brexit vote


Reuters
Updated: 16-01-2019 14:14 IST
Italian bonds outshine flat market as peers digest Brexit vote

Euro zone borrowing costs were little changed on Wednesday as investors digested fallout from the Brexit vote in the British parliament, though Italian debt yields tumbled a day after the country drew record demand for a new 15-year syndicated bond.

Lawmakers rejected Prime Minister Theresa May's Brexit divorce deal late on Tuesday by a crushing margin, and British government bonds underperformed their German peers following that defeat .

May's government faces a no confidence vote on Wednesday.

Italian bonds fell over five basis points across the curve as sentiment was boosted by Tuesday's sale.

Italy raised 10 billion euros in its biggest ever syndicated bond sale, drawing total investor orders of more than 35.5 billion euros ($41 billion), according to a lead manager at one of the banks that helped sell the debt.

Demand for the new bond was buoyed by the resolution last month of a protracted row between Rome and the European Commission over Italy's budget.

The healthy yield offered helped secure what the lead manager said was a record final size and order book for an Italian syndicated issue.

"While this is a clear sign of returning investor confidence after last year's haggle over the deficit, we caution that lingering political risks such as European parliamentary elections in May and rating risks limit any bond spread tightening potential further down the road," said Benjamin Schroeder, senior rates strategist at ING.

Italy's 10-year bond yield, which rose ahead of the debt deal on Tuesday, fell around five bps to 2.816 percent -- its lowest level in almost two weeks.

That squeezed the gap over yields on top-rated German 10-year bonds to 260 bps from around 264 bps late on Tuesday .

In broader euro zone debt markets, 10-year yields were mostly a touch higher on the day.

Analysts said euro zone bond markets also drew support from dovish comments on Tuesday by European Central Bank chief Mario Draghi.

The euro zone's economy is not heading for a recession but still needs support from the European Central Bank as its slowdown could last longer than expected, Draghi said.

"The market mood is also supported by the dovish comments from the Fed speakers over night and Draghi, whose comments suggest rates are not going up any time soon," said Chris Scicluna, head of economic research at Daiwa Capital Markets. (Reporting by Dhara Ranasinghe; editing by John Stonestreet)


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