LONDON: Italian bond prices slipped on Friday as investors digested nearly 8 billion euros of debt sold by Rome at record low yields after weak euro zone data boosted bets the European Central Bank (ECB) may deliver more monetary stimulus.
The sale of new fixed-rate five- and 10-year bonds as well as floating rate 2019 paper prompted some market participants to book profits after a sharp rally in euro zone bonds this week drove yields back to or near to historic lows.
A weakening growth outlook in the euro zone heightened expectations this week that the ECB will eventually start buying assets to prop up anaemic growth in the currency bloc.
Disappointing US data also softened expectations the Federal Reserve would reverse its ultra-easy monetary policy any time soon though bets were tempered after the Fed's James Bullard suggested the economy would be strong enough to bear a rate rise in early 2015.
Demand for euro zone bonds is expected to remain strong against this backdrop, with many in the market expecting Italian yields to fall back in the secondary market towards record lows once the new debt supply has been digested.
"The (Italian) BTP sales are weighing on Italy and Spain. We had a nice rally in the last couple of days and are using the auction to take profit," Natixis fixed income strategist Cyril Regnat said.
"We are quite confident that peripheral debt will perform well in coming months. We will have massive redemptions from Italy and that's good support for Italian BTPs to the end of the year," he said.
Italian 10-year yields were 2 basis points higher on the day at 2.74 percent, just above an all-time low of 2.70 percent reached this month. Spanish equivalents were up by a similar amount at 2.66 percent. CARRY ON Regnat and other analysts said large bond redemptions in coming months, particularly from Italy, should support demand for the bonds as cash is reinvested.
"Going into the summer what we expect is that with a low rate and low volatility environment, this makes carry attractive again," said Michael Leister, a strategist at Commerzbank. "Carry" refers to trades where banks use cheap central bank cash to buy higher-yielding assets.
Traders were also focused on preliminary German inflation data due later in the day, ahead of euro zone numbers on Monday.
Weaker-than-expected numbers could swell the ranks of those who believe the ECB may eventually have to start printing money to buy assets, a process known as quantitative easing. "Any downside surprise in the CPI may force the markets to revise upwards QE probability, in turn supporting further tightening in peripheral spreads," RBS strategists said in a note.
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