Italian bond yields extend falls after govt avoids debt clash with EU

Italian government bond yields again fell to lows not seen since 2016 on Thursday after Italy dodged the threat of disciplinary action over its public finances and as markets bet that the ECB would retain its dovish stance under Christine Lagarde. The European Commission's decision not to pursue an excessive deficit procedure gave fresh impetus for bond buying. In a new concession made close to the deadline, Rome offered a structural improvement of 0.45%, data published by the Commission on Wednesday showed. The headline deficit is now forecast at 2.04% this year.

It is the second time in six months that Brussels has pulled back from a debt procedure against Italy, a sign of Rome's willingness to compromise but also of Brussels' lenient interpretation of EU fiscal rules. Italian 10-year bond yields have fallen over 50 basis points so far this week, putting them on track for their best weekly performance since April 2012, and are now yielding 1.576%, having risen as high as 3.78% last year.

The Italy/Germany bond yield spread narrowed to its tightest since May 2018 at 194 basis points. Government borrowing costs across the single-currency bloc had already tumbled to record lows after EU leaders agreed late on Tuesday to name Christine Lagarde as the ECB's new head. The current of the International Monetary Fund is expected to continue the dovish stance of current ECB President Mario Draghi and introduce more monetary easing measures. Most euro zone 10-year bond yields held close to all-time lows on Thursday.

Germany's 10-year government bond yield fell close to but failed to breach the European Central Bank's deposit rate of -0.40%, a level which analysts say acts as a psychological barrier, despite shorter-dated German bond yields already trading well below the depo rate. "We don't expect it to be breached today, there will not be enough catalysts to get through that point and there is a lot of supply," said Peter McCallum, rates strategist at Mizuho.

France and Spain are due to sell bonds on Thursday. The U.S. 30-year fell to its lowest since 2016, below the Fed Funds target rate, bringing the entire U.S. treasury yield curve under the Fed's main policy rate.

 

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