July 31, 2020 / 7:48 AM / 12 days ago

Italian 10-year bonds set for best month since January

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Yoruk Bahceli

AMSTERDAM, July 31 (Reuters) - Italian 10-year bond yields were set for their biggest monthly drop since January on Friday, boosted by the recovery fund agreed by the European Union last week.

The 750 billion-euro fund, part of which will be offered as grants to member states worst hit by the coronavirus, has been hailed as a game-changer for the euro zone.

That has boosted Italian debt, given concerns around the sustainability of the country’s debt.

Italy’s 10-year yield dropped 30 basis points in July to its lowest since early March, its biggest monthly fall since January. That also dragged down the risk premium it pays over Germany for 10-year debt to March lows.

But safe-haven German government bonds had a decent month as well, set for their biggest monthly decline in yields since April. They are also set for their best performance in seven weeks.

Safe-haven bonds are likely to remain supported given the rise in coronavirus cases around the world, raising fears of new lockdowns.

“With periphery yields still falling to new lows since March, however, it seems that investors are treating periphery sovereigns as preferred pick-up havens in view of the EU and ECB support,” Commerzbank analysts told clients. Declining risk appetite would usually lead to a rise in the yields of riskier bonds like Italy’s.

Data releases remain the focus on Friday, with second-quarter gross domestic product and July inflation for the European Union due at 0900 GMT.

The releases come after a record contraction in German economic growth in the second quarter and inflation slower than expected. Those reports sent Bund yields to two-and-a-half-month lows on Thursday.

“That disappointment should have primed markets for similarly weak Eurozone-wide numbers to be released today,” ING analysts told clients.

German 10-year yields were unchanged at -0.55%, holding near 2-1/2 month lows. Italian 10-year yields were down 1 basis point to 1.02%, near their lowest since early March.

Analysts said month-end index extensions, where funds rebalance their portfolios to reflect activity during the month, were also likely to continue supporting bonds on Friday. (Reporting by Yoruk Bahceli, editing by Larry King)

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