Italy's 10-year yield hits record low as deflation underpin bonds
Italy's 10- year bond yield fell to a record low on Friday as the country's debt outperformed a broader bond rally after U. S. President Donald Trump tested positive for the coronavirus.
Trump's positive test result added to uncertainty around November's presidential election, which has bolstered demand for safe- haven bonds recently. Bonds were also supported by worries about the impact of a second coronavirus wave on the economy, as euro zone inflation dropped to minus 0.3%, the lowest in over four years, according to the first estimate for September.
The fall into negative territory was deeper than expected, and another reading tracked closely by economists excluding food, energy, tobacco and alcohol fell to a record low of 0.2%, stoking concerns of a deflationary spiral.
The figure, which was worse than initial forecasts, was largely expected after German and Italian inflation readings missed estimated earlier in the week. A key market gauge of long- term inflation expectations fell to its lowest since midJuly at 1.1339%.
"If there is no improvement in the data, Lagarde should announce an expansion of the bond purchase programme before end of the year," said Nicolas Forest, global head of fixed income at Candriam, referring to European Central Bank ( ECB) President Christine Lagarde.
The data comes as divisions between dovish policymakers at the ECB have become more evident, and Lagarde set the scene for a change to the way the bank targets inflation earlier this week.
Italian debt outperformed the broader demand for fixed income, pushing the 10- year yield to a record low of 0.735%, according to Tradeweb, which cites the August 2030 benchmark . It was last down 4 basis points ( bps) on the day. The risk premium Italy pays on top of 10- year German debt fell to 132 bps, its lowest since Feb. 24.
Italian bonds have continued to see support this week despite weak economic data and talk of delays to the European Union's recovery fund, as investors favour higher-yielding assets. "BTPs narrowed versus Germany regardless through risk on and risk off, which I think is important, because you could argue that there is an asymmetric risk on offer here," said Richard McGuire, head of rates strategy at Rabobank.
He was referring to the likelihood that the ECB will add to its stimulus, of which Italian debt would be a primary beneficiary. Safe-haven German 10-year yields fell as low as -0.551% in early trade just a touch off their lowest in nearly two months hit earlier this week.
They were last down 2 bps at - 0.54%.Investors will watch U.S. nonfarm payrolls data due at 1230 GMT, expected to fall from August.