Eurozone yields nudge up, little concern around Italian local elections

[MILAN] Eurozone 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 eurozone bonds.

Safe-haven German 10-year bond yields were up 1 basis point in late Friday trade at -0.49 per cent, after hitting 3.5-week lows on Thursday.

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

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 eurozone and bring inflation closer to its 2 per cent target, ECB policymaker Pablo Hernandez de Cos said on Friday.

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"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 eurozone banks exclude some of their exposure from the calculation of a key capital requirement until June 2021 is expected to shore up demand.

"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 points.

Italy assigned on Friday the maximum planned amount of two billion euros of bonds due 2032 in an auction in exchange for four bonds due between 2021 and 2021.

REUTERS