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UPDATE 2-Fresh record lows for Italy, Greek debt yields

Tue, 13th Oct 2020 13:15

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

By Dhara Ranasinghe

LONDON, Oct 13 (Reuters) - Long-dated sovereign bond yields
in Italy and Greece touched fresh record lows on Tuesday, with
Italian borrowing costs at an auction also hitting new all-time
lows in the latest sign of solid demand for peripheral euro zone
debt.

Expectations of further European Central Bank stimulus to
prop up an economy hit by the coronavirus have bolstered debt
markets in recent weeks.

In addition, bond issuance is not as heavy as it was a few
months ago - meaning upward pressure from anticipated bond
supply has eased. Most euro zone issuers have now achieved 80%
or more of their gross bond issuance target for 2020, Rabobank
estimates.

"That rally in peripheral bonds has meant we are near our
year-end target on spreads," said Andrew Sheets, Morgan
Stanley's chief cross-asset strategist.

"I really think this is a story about supply - the periphery
frontloaded its funding needs earlier this year so now as we
move into the latter part of the year, not as much bonds are
being issued so that creates a favourable supply/demand
dynamic."

Italy sold the top planned amount of 7.5 billion euros
($8.84 billion) worth of bonds on Tuesday. It placed a new
three-year bond with a -0.14% gross yield, the lowest level
ever.

Italy's 10-, 30- and 50-year bond yields all touched fresh
record lows. Italian 10-year bond yields fell to 0.656%
and the real yield, which takes inflation into
account, neared 0%.

Spanish and Portuguese 10-year nominal bond yields, which
have also lurched closer to 0%, held near their lowest levels in
months.

The Italian/German 10-year bond yield gap was at 121 basis
points, after narrowing on Monday to its tightest
since May 2018 at around 117 bps.

That spread is down almost 200 bps from a brief spike at the
height of the coronavirus-induced market panic in March to just
above 300 bps. That was just before the ECB stepped in with its
Pandemic Emergency Purchase Programme to help calm markets.

The fact that even safe-haven German bonds have held their
ground as equity markets rallied suggests demand for European
fixed income remains firm, analysts said.

Germany's 10-year Bund yield touched -0.56%, its
lowest since August, French 10-year bond yields hit -0.30% --
their lowest level since March.

German investor sentiment fell by more than expected in
October, the ZEW economic research institute said.

"ECB speakers are getting a lot more vocal on more monetary
stimulus, we are also seeing some decent demand for curve
flatteners in Europe. We are positioned in France and Italy that
way," said Sabrina Jacobs, fixed income investment specialist at
Insight Investment.

"The ‘grab for yield’ continues."

(Reporting by Dhara Ranasinghe, additional reporting by Julien
Ponthus editing by Larry King, Catherine Evans and Giles Elgood)

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