June 11, 2018 / 6:19 AM / a year ago

Italy's bond yields fall as it commits to euro, plays down 'mini-BOTs'

LONDON (Reuters) - Italian borrowing costs fell sharply on Monday, narrowing the gap over German peers after the economy minister said the new coalition government had no intention of leaving the euro zone and planned to cut debt levels.

FILE PHOTO: Presentation of a new 2 Euro commemorative coin of former German Chancellor Helmut Schmidt in Berlin, Germany, February 2, 2018. REUTERS/Christian Mang

In his first interview since taking office a week ago, Giovanni Tria told the Corriere della Sera newspaper on Sunday the coalition was committed to remaining in the single currency and wanted to boost growth through investment and structural reform.

Tria also distanced himself from calls within the coalition for the government to issue securities to pay individuals and companies owed money by the state - a measure seen in markets as first step to exiting the euro.

“Maybe Tria’s comments are a bit more blunt and reassuring than markets were expecting and that explains the move in Italian bonds, but we are still in an illiquid market for BTPs (index-linked Italian government bonds) and that’s illustrated in the market reaction,” said ING senior rates strategist Martin van Vliet.

Italy’s two-year bond yield tumbled 60 basis points to 1.08 percent IT2YT=RR in volatile trade. Ten-year bond yields fell 30 bps to 2.83 percent IT10YT=RR, their biggest one-day fall in six years, squeezing the gap over benchmark German Bund yields to 235 bps from 268 bps late on Friday.

Tria’s comments provided some reassurance for investors, rattled in the past month by fears that the coalition of the anti-establishment 5-Star and far-right League would embark on a spending splurge.

One of the most radical proposals was the issuance of “mini-BOTs” - securities to pay individuals and companies who are owed money by the state as payment for services or as tax rebates.

“The mini-BOT proposal is inflammatory, so he (Tria) is saying the right things,” said Chris Scicluna, head of economic research and Daiwa Capital Markets.

“However you have to question how much influence he will have on the new government. The range of issues he is talking on raises question marks about the agreed program between 5-Star and League,” he said.

As Italian bond prices rose, pushing yields down, demand for safe-haven German bonds waned.

Germany’s 10-year Bund yield was up 5 basis points at 0.50 percent DE10YT=RR.

“I would say we’ll see some choppiness in the next few months because of uncertainty over what direction the (Italian) coalition will take,” said Mike Stritch, chief investment officer for BMO Wealth Management. “But we are in an environment of relatively strong global fundamentals and in the EU specifically we are continuing to get relatively positive momentum on the economic front.”

The rise in safe-haven German bond yields came as fears of a global trade war weighed on broader markets after U.S. President Donald Trump backed out of a joint Group of Seven communique over the weekend.

Thursday’s European Central Bank meeting also loomed.

With the bank set to debate whether to end massive bond purchases this year, and a policy shift anticipated either on Thursday or in July, a key gauge of the market’s long-term inflation expectations - the five-year breakeven forward rate - rose to four-month highs.

“June or July, the bottom line does not change: net asset purchases are set to end soon,” said Luigi Speranza, head of European economics at BNP Paribas.

Reporting by Dhara Ranasinghe, Additional reporting and graphics by Sujata Rao; editing by Robin Pomeroy/David Evans

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