Italian bonds 'encouragingly' steady before debt auction

Italian government bond yields were steady before an auction of debt, amid hopes the country's efforts to contain the spread of the coronavirus may be starting to work.

With European Central Bank stimulus helping calm investor nerves over the past week, Italian yields were only few basis points higher as the country prepared to sell up to 8.5 billion euros of debt via auctions later on Tuesday. Italy's benchmark 10-year yields dropped three basis points to 1.46%, half what they were on March 18, when panic over impact of the disease was at its peak.

High-grade euro zone bond yields, such as Germany's, rose six to seven basis points across the board on the change in risk sentiment. "Today, Italian yields seem to be not under pressure. That is very encouraging indeed ahead of such a big auction," said DZ Bank rates strategist Daniel Lenz.

He said that one reason could be that the latest numbers from Italy show a decreasing number of new infections, suggesting the country's strict lockdown and social distancing measures are finally working. "The other thing, is since the ECB has announced PEPP, there is a lot of demand for sovereign debt," he added, referring to the ECB's announcement that it would buy 750 billion euros of debt this year under a new Pandemic Emergency Purchase Programme.

While Italian auctions are always closely watched, given the country's enormous debt and low credit rating, this particular debt sale is more crucial than ever, analysts believe. Italy has been the epicentre of the coronavirus crisis in Europe and has suffered more deaths related to the virus than any other country.

Also, its ratio of debt to gross domestic product is among the highest in the euro zone and likely to go much higher as it grapples with the economic fallout of lockdown measures enacted to contain the virus. The country's credit rating is only a couple of notches away from junk -- potentially taking it out of investment-grade indexes, an additional source of concern.

Italy plans to sell five-year and 10-year debt to raise between 6.25 billion and 7.75 billion euros and an additional 500 million to 750 million euros of certificates called CCTs. Most Italian bond yields dipped on the day, with two-year yields falling 6 basis points to 0.31% and five-year yields falling 3 bps to 0.4%.,

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