June 1, 2020 / 8:55 AM / a month ago

UPDATE 3-Italian bond yields slip as risk appetite grows; ECB eyed

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By Yoruk Bahceli

LONDON, June 1 (Reuters) - Italian bond yields slipped on Monday as higher-rated bond yields edged up, echoing risk appetite across global markets as investors prepared for Thursday’s European Central Bank meeting.

Moves echoed growing risk appetite in stock markets, which focused on the opening up of economies. Investors were also relieved on the trade war front after Washington kept the China trade deal intact after moving to end Hong Kong’s special status.

Euro zone bond markets also focused on the European Central Bank, which is expected to increase its bond-buying programme on Thursday, probably by around 500 billion euros.

“It appears as if the market is simultaneously pricing in a V-shaped recovery, the ECB enjoying a free hand on the asset purchase front, the EU recovery plan being agreed as is and the geopolitical concerns that weighed on sentiment prior to the virus remaining dormant in its wake,” Rabobank analysts told clients.

They warned that the United States is likely to eventually remove Chinese-ruled Hong Kong’s special privileges to pressure China, a risk for markets.

Italian 10-year bond yields remained at near two-month lows on Monday, down 4 bps to 1.45%. The risk premium they pay over their German equivalents was at 184 bps, down 5 bps on the day , near two-month lows.

Safe-haven German 10-year bond yields rose 5 bps to a three-week high of -0.39%.

Italian manufacturing activity shrank in May but much less steeply than the month before, another sign of optimism for the economy as it emerges from lockdown.

The fall in Italian yields comes after they notched their biggest monthly fall in four months in May, boosted by the likelihood the country will get grants from the European Union to support its coronavirus-hit economy.

UniCredit analysts noted that, in addition to the EU’s recovery fund proposal, which would offer 500 billion euros of grants to benefit the worst-hit economies like Italy, statements by ECB policymakers that they would apply capital keys in a flexible manner have fed the rally in Italian bonds.

The bank is able to apply the capital key - which governs how it allocates its purchases based on each country’s shareholding in the ECB - flexibly for its emergency purchase programme. Its bond purchases have been a key factor holding down Italy’s borrowing costs.

Germany is working on a stimulus package worth 75 billion-80 billion euros to support its coronavirus recovery, according to weekly Bild am Sonntag.

Reporting by Yoruk Bahceli; editing by Nick Macfie and Lisa Shumaker

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