Euro zone bond yields dip on political uncertainty
AMSTERDAM, Jan 13: Euro zone bond yields dipped on Wednesday, with Italian bonds lagging Germany's as uncertainty over the government in Rome weighed on sentiment.
Italy's former Prime Minister Matteo Renzi said on Tuesday that Italy should apply for a loan from the euro zone's bailout fund. He told current premier Giuseppe Conte he was ready to sink his government if he refused, which could lead to a major cabinet reshuffle.
Ten-year Italian government bond yields were down 2 basis points to 0.62per cent in early trade on Wednesday after an 10 bps rise on Tuesday delivered their worst session since early November.
Five-year Italian yields returned to negative territory after rising above zero for the first time since mid-November on Tuesday.
Although Tuesday's moves reflected political uncertainty, this has not materially raised the likelihood of a snap election, bond analysts said, and Wednesday's price action so far supported that view.
Investors took the opportunity to take profits on Italian government bonds, they said, after the risk premium offered had fallen to its lowest since 2016.
On Wednesday the closely-watched gap between 10-year Italian and German yields - effectively the risk premium on Italian debt - rose to 111 basis points, its highest in nearly a week.
"If Renzi leaves the government, it could trigger a reshuffle and a new government, but the impact on the Italian government bonds should not be long lasting," Jens Peter Sorensen, chief strategist at Danske Bank in Copenhagen, said.
"We expect the spread to stabilise as this is more on internal political noise in the Italian government rather than Italy's commitment to Europe."
Italy's risk premium rose as benchmark German 10-year yields fell 3 basis points after rising on Tuesday in tandem with US Treasuries.
The focus will also be on debt sales, after Spain received 88 billion euros ($107.31 billion) in initial demand for a 10-year bond it is selling via a syndicate of banks, Refinitiv capital markets news service IFR said. �Reuters