Italy’s bond yields tumble on budget hopes, Bund yields up

LONDON, Sept 25, (RTRS): Italian borrowing costs fell sharply on Tuesday, narrowing the gap with German peers, on signs the country’s anti-establishment coalition is likely to reach a compromise over its 2019 budget.

In contrast, German bond yields rose to four-month highs, as a bearish tone in broader bond markets lingered a day after European Central Bank chief Mario Draghi pointed to a “vigorous” pick-up in underlying inflation.

Italy’s ruling coalition, made up of the 5-Star Movement and the League party, is willing to keep its budget deficit below 2 percent of gross domestic product, a government source told Reuters.

Italy’s La Stampa reported that the government will offer a 2019 deficit plan of 1.9 percent of GDP this week, including a 36 billion euro ($42 billion) investment package. The government must present its budget targets this week.

“It looks like a compromise is taking shape,” said Martin van Vliet, senior rates strategist at ING. “Everyone assumes it (the deficit forecast) will be around 2 percent.”

Italian bond yields were down 7 basis points, having fallen as much as 12 basis points earlier in the day . The move reversed most of the rises made after Draghi’s speech on Monday.

Italy’s 10-year bond yield was at 2.89 percent percent, having hit a two-week high at 2.96 percent on Monday. This shrank the spread over benchmark German Bund yields to around 232 bps, from around 245 bps late on Monday.

Its five-year bond yield fell 7 bps to 1.90 percent, having recorded its biggest one-day rise since Aug 13 on Monday.

Outside Italy, most euro zone bond yields were 1 to 3 bps higher. French 10-year bond yields hit their highest in over three months.