May 7, 2020 / 7:57 AM / 2 months ago

Italian yields hit two-week highs as bond sales keep markets under pressure

* Euro zone periphery govt bond yields:

By Yoruk Bahceli

LONDON, May 7 (Reuters) - Italian bond yields rose to two-week highs on Thursday as euro zone bonds remained under pressure due to more hefty issuance while the German court ruling targeting an ECB bond purchase programme remained in focus.

France and Spain were due to sell up to a combined 18.75 billion euros ($20.3 billion) of bonds on Thursday following Germany’s first syndicated bond since 2015, which raised 7.5 billion euros on Wednesday alongside a 3.2 billion auction.

“The auction volumes of today’s government bond sales come as a gentle reminder of the ECB’s important role in keeping mounting debt levels affordable,” ING analysts said.

The German court ruling threatens to jeopardise one of the ECB’s bond buying programmes (PSPP) unless it can show the scheme was proportional and has worried investors about the future of the ECB’s emergency purchase scheme (PEPP).

However, the Bundesbank will have to take the lead in persuading authorities that the ECB has not exceeded its powers to avoid compromising the ECB’s independence, sources told Reuters.

Italian 10-year bond yields rose above 2% for the first time in nearly two weeks, a level that some analysts say starts to throw Italy’s debt sustainability in danger.

Yields were 3 basis points higher on the day after climbing 10 basis points on Wednesday as markets worried about the amount of upcoming issues.

“The outright direction (of yields) is not a specific Italian story here, but the spread widening suggests that some investors remain at least irritated or concerned for the way forward for the ECB and whether this ruling out of Germany could change the purchase pattern in the future,” said Commerzbank rates strategist Rainer Guntermann.

German 10-year yields rose 1 basis point to -0.50% after rising 7 basis points on Wednesday in their worst trading session in a month.

The country’s industrial sector is expecting an unprecedented collapse in production, the Ifo institute said, citing its industrial output index for the coming three months.

European Central Bank chief Christine Lagarde will also be closely watched on Thursday, as she is scheduled to take part in a Bloomberg online webinar at 1400 GMT. ($1 = 0.9255 euros) (Reporting by Yoruk Bahceli; Editing by David Clarke)

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