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Italian yields at record lows as markets bet on a further ECB boost

Mon, 12th Oct 2020 08:54

* Italy 30-year yields drop to fresh record low of 1.60%

* Spain, Portugal 10-year yields drop below 0.20%

* Bund-Treasury spread widens as U.S. powers ahead

* Euro zone periphery govt bond yields

By Abhinav Ramnarayan

LONDON, Oct 12 (Reuters) - Southern European government bond
yields are hovering near record lows as investors anticipate a
fresh round of European Central Bank stimulus to help jumpstart
an economy that has had a bumpy recovery from the depths of the
COVID-19 crisis.

Italian 30-year government bond yields hit a new record low
on Monday while Spanish and Portuguese borrowing costs were also
hovering around one-year lows, with their 10-year yields heading
back towards zero.

This reflects a slower-than-expected economic recovery in
Europe and remarks from key policymakers that suggest the need
for further monetary and fiscal stimulus, analysts said.

"The main reason is the ever rising probability of ECB
support, especially an extension of quantitative easing," said
ING rates strategist Antoine Bouvet. "Recent remarks by (ECB
chief economist) Philip Lane and (ECB executive board member)
Isabel Schnabel does suggest this is an environment for duration
and spreads," he added.

Indeed, the long end of Italian and Spanish bond curves have
been particular performers, with Italian 30-year yields dropping
seven basis points on Friday alone to 1.60% and down about 40
basis points over the past month.

It hit a new record low of 1.598% on Monday.

Benchmark 10-year yields for Spain and Portugal are at 0.17%
and 0.18% respectively, with analysts refusing to rule out a
first-time dip into negative territory for this debt.

Pictet Asset Management chief economist Frederic Ducrozet
pointed out that the ECB's Lane used the word "uncertainty" 11
times and the word "fiscal" 16 times in a recent Wall Street
Journal interview.

"That's all you need to know about the ECB's outlook right
now," he said on Twitter.

Meanwhile, the economic divergence with the United States
continues apace, and bond markets are reflecting this.

The spread between German Bund yields and their U.S.
Treasury counterparts is at its widest since March on 132 basis

"The U.S. has been doing a lot better economically in this
recession than Europe, but there is a lot of hard data this week
that should give us a better picture," said Bouvet of ING.

It will take awhile for the effects of the upcoming
presidential election and mooted fiscal package to make
themselves clear, he added.

Later this week, there's bond auctions from Italy, the
Netherlands, Germany, Portugal, France and Spain in a busy week
for debt supply.

(Reporting by Abhinav Ramnarayan, Editing by William Maclean)

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