Italian/German bond yield gap nears 2017 lows, helped by ECB buying data

LONDON: The premium investors are willing to pay to hold Italian government bonds over top-rated German ones held close to 2017 lows yesterday following signs of outsized buying of Italian debt by the European Central Bank.

Data released late on Monday showed the ECB bought far more Italian bonds than it was supposed to in July for its monetary stimulus scheme, making up for a dwindling supply of eligible debt elsewhere in the currency bloc.

The ECB and Bank of Italy together bought 9.6 billion euros worth of Italian debt, nearly one and a half billion euros more than the composition of the 60-billion euros monthly purchase would dictate.

This was the biggest deviation from Italy’s quota relative to the size of the overall monthly amount.

French and Spanish bond purchases were also oversized compared to their shares of the ECB’s capital, the yardstick used to determine how many bonds must be bought.

The overbuying of Italian and Spanish bonds by the ECB has helped pin down yields in peripheral Europe, while speculation grows that the central bank is likely to signal a scaling back of the purchase programme in coming months given stronger economic growth.

“It is interesting that we see a persistent deviation of the ECB’s capital key target and that it bought more Italian bonds than it should. Relatively this is supportive for BTPs,” said Martin van Vliet, senior rates strategist at ING.

Italy’s 10-year bond yield was little changed at around 1.98 per cent on Tuesday, leaving the gap over benchmark 10-year German Bund yields at around 153 basis points – just a touch above this year’s lows hit last week at around 152 bps. — Reuters