Italian bond yields set for biggest monthly fall since 2013

Italy’s 10-year yield has dropped some 58 basis points in August. (AFP/Getty pic)

LONDON: Italian bond yields fell on Friday, on track for their biggest monthly decline in more than six years, as political risk abated and expectations for European Central Bank stimulus raised demand for the euro zone’s higher-yielding sovereign debt.

Euro zone bond markets in general were set to end August with another month of falling yields.

Portuguese yields were on track for a 10th straight month of declines; German yields for their biggest monthly drop since 2016.

Italy’s bond market was one of the bloc’s best performers as investors grabbed the positive-yielding debt.

Its 10-year yield has dropped some 58 basis points in August, set for its biggest monthly fall since early 2013. It was last down 3 bps at 0.96%, close to Thursday’s record low.

The 50-year Italian yield is down 57 bps in August, the biggest decline since it was first offered in late 2016.

Italian bond prices have soared this week after the anti-establishment 5-Star Movement and opposition Democratic Party reached an agreement on a coalition government.

“You have a background of a slowing euro economy with no progress on the inflation front, an increase in global risks, partly due to the US-China trade tensions,” said John Davies, G10 rates strategist at Standard Chartered.

“The upshot of all of that is an ECB that is expected to ease policy further, at least by cutting rates, but the extent of the rally into the periphery tells you that the market is pinning its hopes on a renewed quantitative easing programme.”

Even reports that 5-Star needs to get the deal approved by its members failed to curb the bond rally, although a coalition failure would be an unpleasant surprise.

The market has already priced in a new government that can set the 2020 budget and run into 2020, said Antoine Bouvet, senior rates strategist at ING.

Portugal’s 10-year bond yield, down 22 bps in August, is set for a 10th month of falls – its longest streak of monthly falls on record, according to Refinitiv data.

Safe-haven Germany’s 10-year bond yield was steady at -0.70% , close to record lows.

It was set for its biggest monthly decline since June 2016, when Britain’s decision to leave the European Union sent shook up world markets.

Euro zone inflation remained low at 1% in August, below the ECB’s target, a first estimate showed on Friday, reinforcing market expectations for monetary stimulus in September.

US inflation data is also due later on Friday.

The latest comments by ECB officials did little to move markets, given the stimulus expectations expected at the central bank’s September meeting.

But ECB executive board member Sabine Lautenschlaeger said it was too early to consider a “huge” stimulus package.