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UPDATE 2-Euro zone yields nudge up, little concern around Italian local elections

Fri, 18th Sep 2020 12:47

* Focus remains on ECB

* Strong demand seen for TLTRO next week

* Little concern around Italian elections
(Adds details, updates prices)

By Stefano Rebaudo

MILAN, Sept 18 (Reuters) - Euro zone government bond yields
edged up on Friday but prices remained supported as attention
remained on the European Central Bank and there was little
concern around an upcoming Italian local election.

Thursday's Bank of England (BoE) statement about a possible
cut in interest rates below zero, which triggered a
rally in gilts, supported euro zone bonds.

Safe-haven German 10-year bond yields were up 1
basis point in late Friday trade at -0.49%, after hitting 3-1/2
week lows on Thursday.

Italian 10-year yields were also up 1 basis point to 0.96%,
after falling to a new six-month low in earlier trade at 0.942%.

Focus remained on the European Central Bank on Friday, as
policymakers continued to come out with dovish statements
following last week's policy meeting, where the bank's sanguine
message took markets by surprise given concerns around the
bloc's inflation outlook and the appreciation of the euro.

The European Central Bank (ECB) may need to introduce fresh
stimulus measures to support an uneven and uncertain recovery in
the euro zone and bring inflation closer to its 2% target, ECB
policymaker Pablo Hernandez de Cos said on Friday.

"It is possible that the BOE's communication on NIRP
(negative interest rate policy) has also landed a little bit of
credibility to ECB doves talking up the odds of an additional
deposit rate cut," ING analysts told clients.

Focus is also on next week's allotment of the ECB's cheap
TLTRO loan programme for banks.

The bank's announcement it would let euro zone banks exclude
some of their exposure from the calculation of a key capital
requirement until June 2021 is expected to shore up

"Although the allotment will be lower than in June, it will
nevertheless bring additional liquidity to the system,” a
Unicredit research note said.

Investors seemed to shrug off regional elections and a
constitutional referendum in Italy on September 20-21, since
they do not see risks of political instability.

The national government is unlikely to fall as a result of
the elections, although they could put pressure on the
government for a cabinet reshuffle.

Citi analysts said the elections look "inconsequential" for
Italian government bonds and expect the risk premium Italy pays
on top of Germany for 10-year debt to hold at an average of 150
basis points for much of 2021. It is currently at 145 basis

Italy assigned on Friday the maximum planned amount of 2
billion euros of bonds due 2032 in an auction in exchange for
four bonds due between 2021 and 2021.
(Reporting by Stefano Rebaudo, additional reporting by Yoruk
Bahceli; Editing by Chizu Nomiyama and Philippa Fletcher)

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