Italian yields jump as surprise 20-year bond sale shakes up market

Italy's long-dated government bond yields rose sharply on Wednesday after the country launched a surprise 20-year bond sale to take advantage of hefty demand for euro zone debt. Italy has received orders worth more than 23.5 billion euros for the new bond, a lead manager told Reuters.

The final yield on the new March 2040 issue has been set at 12 basis points over the outstanding March 2038 benchmark, down from an initial guidance of around 16 basis points. Demand for the sale was strong even though the European Union is expected to take disciplinary action against Rome over the country's growing debt.

"Right now, the carry and the ECB monetary easing is cancelling out the negative headlines," said DZ Bank strategist Daniel Lenz. The term "carry" refers to a trade where investors take advantage of low short-dated borrowing costs to pick up some yield by buying longer-dated debt. Italy's 10-year bond yield was up 10 basis points at 2.41%, with 20- and 30-year yields rising a similar amount.

Yields usually rise ahead of a sale, with investors selling outstanding debt to make space for the new supply. But the move comes after a strong rally in recent days, which saw Italy's 10-year yield drop 30 bps in the first week of June to a one-year low of 2.28%.

Spain also hit bond markets on Wednesday, and recorded over 31 billion euros of demand for 10-year debt even though the country's debt is trading at record low yields. The country was set to price a 6 billion euro bond issue at 33 basis points over mid-swaps, according to a lead manager, a level that suggests a final yield of just above 0.60% according to Reuters calculations.

DZ Bank's Lenz said the carry was the predominant factor driving demand for Spanish bonds. "Spanish yields have hit record lows, but there is still a positive carry and it does not include the risk you have on Italy," he said. Spain usually launches a 10-year bond sale around this time of the year, so the market reaction was muted, with the country's benchmark 10-year yield unchanged at 0.58%.

Elsewhere, German 10-year bond yields, the benchmark for the bloc, dropped to minus 0.24%, close to record lows hit last week, as concerns about the global economy grow in the shadow of a trade dispute between its two largest economies. U.S. President Donald Trump on Tuesday defended the use of tariffs as part of his trade strategy while China vowed a tough response if the United States insists on escalating trade tensions amid ongoing negotiations.

German and U.S. bond yields fell further after soft U.S. inflation data boosted expectations for U.S. rate cuts. In the euro zone, a key market measure of long-term inflation expectations fell to a new record low below 1.18% . ($1 = 0.8831 euros)

(Reporting by Abhinav Ramnarayan; Additional reporting by Dhara Ranasinghe; Editing by Alison Williams)

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