Italy bond selloff resumes

LONDON, May 23, (RTRS): German 10-year bond yields hit fiveweek lows on Wednesday, after news of a slowdown in eurozone business activity cast doubt on the timing of the ECB’s planned exit from its hefty stimulus programme.

While most top-rated eurozone bond yields fell, Italy’s bond market succumbed to selling again with the weak data encouraging investors to dump the eurozone’s riskiest assets.

Italy’s 10-year bond yield, pushed up by growing political risks, hit a 14-month high — widening the gap over German Bund yields by 18 basis points.

IHS Markit’s Eurozone Composite Flash Purchasing Managers’ Index (PMI), considered a good guide to economic health, sank in May to an 18-month low of 54.1 from 55.1, below all forecasts in a Reuters poll, which predicted a dip to 55.0.

That followed weaker-thanexpected PMIs in Germany and France, the two biggest eurozone economies, which alongside soft inflation suggested a stiffer policy challenge for a European Central Bank hoping to exit monetary stimulus.

“We had expected some stabilisation (in the PMIs). Clearly, we have not seen that, and the deceleration has increased downside risks to Q2 growth, which is a worry,” said Peter Kinsella, senior currency and rates strategist at CBA.

“We had anticipated that the ECB would give us some forward guidance in June. They may put a hold on that or give just a modest form of guidance.”

Ten-year bond yields in the single currency bloc, with the exception of southern Europe, fell 3 to 6 basis points.

Doubt over whether a North Korea summit next month would take place also gave investors another incentive to buy German bonds, considered one of the world’s safest assets. Bund yields fell to fiveweek low of 0.496 percent.

But Southern European bonds were hit by new signs of momentum slowing. Portuguese, Italian and Spanish bond yields all rose.

Italy, also whacked in the past week by concern a spendthrift coalition government was taking shape in Rome, looked the most vulnerable. Its 10-year bond yield shot up more than 10 bps to 2.46 percent, while 2-year Italian yields hit their highest since July 2015 at 0.306 percent.

The cost of insuring exposure to Italian and Spanish debt rose to multi-month highs on concerns over Italy’s political risks and broader pressure on markets.

“The PMIs were certainly surprising to us this morning,” said Investec economist Ryan Djajasaputra.

“It now also raises questions over the timing of the next move on the ECB, whether there actually will be a rate hike in the summer of 2019.”

Money market pricing on Wednesday suggested investors were scaling back bets the ECB would raise rates by mid-2019.