Italy bond yields fall to 2-1/2-week low

Italian government bond yields tumbled to 2-1/2 week lows on Friday, pushed down by what traders said were conciliatory comments from Italy's deputy prime minister Matteo Salvini. Salvini said his right-wing League party wanted to change European Union fiscal rules to push through tax cuts because it would not want a deficit overshoot that lifted debt costs.

He said he was ready to discuss the issue with French and German leaders after an EU parliament election on Sunday. That indicates he may be toning down his recent comments in which he said he was ready to rip up EU budget rules.

In addition, exit polls showing a surprise victory for the Dutch Labour party in an election for the European parliament, beating a Eurosceptic challenger who had been topping the polls, helped lift sentiment towards the euro.

Italy's two-year bond yield fell almost 10 bps to a 2-1/2 week low of 0.48%. Ten-year bond yields also fell to their lowest in around 2-1/2 weeks at 2.55% and were last down eight bps on the day.

Just a month ago, European equities were competing with the US for stellar 2019 returns and Goldman Sachs Group Inc. had raised its target for the region's stocks citing expectations that China's stabilising economy would boost Euroarea expansion. Now, they're heading for their first monthly drop since the December plunge with little optimism on offer for the coming days.

Even before the recent setbacks, European stocks struggled to attract investor appetite, making their start-of-the-year rally a low-participation one. With Theresa May's premiership hanging by a thread in the UK, German business confidence at a four-year low.