Italian bonds rally as bad loans tumble

Italian government bonds out-performed the rest of the market on Monday after the Bank of Italy published data showing the country’s banks shed more than 17 billion euros in gross bad loans in December.

Support for riskier assets was reflected in a sell-off in core euro zone paper, with Germany’s 10year government bond yield rising by almost three basis points to 0.11 percent, pulling away from Friday’s low of 0.077 percent. Progress in China-US trade talks had lifted sentiment, analysts said.

Italian two- and five-year government bond yields dropped by up to 10 basis points after the Bank of Italy reported a 34 percent year-onyear fall in impaired loans.

Bad loans held by Italian banks swelled to 360 billion euros in 20152016 following a deep recession and lenders have been working to reduce them in the past two years.

The boost to Italian bonds from the falling stock of non-performing loans came despite reports of a revamp at the Bank of Italy and the expectation of early elections, Commerzbank rates strategist Christoph Rieger said.

“(Deputy Prime Minister Matteo) Salvini is seeing the chance of becoming Prime Minister looking at some of the recent surveys,” he said. “This won’t abolish uncertainty but the markets will probably take it well.”

Italy’s populist leaders on Saturday promised to replace top officials at the country’s central bank, who they said must pay for failing to prevent a spate of banking scandals in which thousands lost their savings.

The bond rally also comes despite expected pressure on the Italian government for further fiscal adjustment following the European Commission’s downwards revision of its growth forecast. (RTRS)