Italian bond yields hit 3-1/2 month low after strong auction

LONDON: There will be no London-based bond report on Monday, December 31, as Eurex is closed for trading of bond futures.

Italy's 10-year borrowing costs dropped to their lowest level in 3-1/2 months on Friday after the national debt agency recorded a dramatic drop in funding costs but still received enough demand to sell a maximum of 5 billion euros of bonds.

The auction was seen by investors as a signal that Italy has turned a corner after months of volatile trading on the back of fractious talks between Rome and Brussels over its spending plans.

"We are no longer at a stage where Italy should have any issues selling bonds," said Mizuho strategist Antoine Bouvet.

"Though I think we can see that there's still preference for the liquidity points in the curve," he added. Demand was higher for the debt maturing in February 2028, which has an outstanding size of over 19 billion euros.

Soon after the auction, Italy's 10-year government bond yield dropped to 2.71 percent, its lowest since Sept. 11. The closely-watched Italy/Germany 10-year bond yield spread tightened to 249 basis points, also its lowest since mid-September.

Five-year yields were 3 basis points lower at 1.79 percent.

Political turmoil, turgid growth prospects and worries over the future of the euro have made this one of the most difficult years for the Italian Treasury to fulfil its big borrowing programme.

But after weeks of wrangling, an agreement between Italy and the EU on a budget plan for 2019 has led to a sharp rally in Italian bonds; Italian 10-year yields have dropped 49 bps in December so far, the biggest monthly fall since July 2015.

Elsewhere, Germany is set to release inflation data at 1300 GMT, with a Reuters poll showing expectations are for a 1.9 percent increase in consumer prices.

Data for a slew of German states have already been released, and have generally been around the 1.8-2.2 percent mark. The most populous state, North Rhine-Westphalia, recorded inflation of 1.8 percent in the month of December.

Spanish inflation, meanwhile, missed expectations by a big margin, coming in at 1.2 percent for the month of December compared to forecasts of 1.6 percent.

Spanish 10-year government bond yields rose 2 bps nevertheless, and were trading at 1.41 percent at 0850 GMT.

"I was surprised at the lack of reaction (to the Spanish inflation), I do think it's a cause for concern," said Bouvet of Mizuho.

"But maybe we have to wait and see how it correlates with other big countries, starting with Germany today."