Italian bond yields touch lowest since March in ECB, EU summit countdown

AMSTERDAM: Italy's 10-year bond yields briefly fell to their lowest since late March on Wednesday, as a light data calendar kept focus on Thursday's European Central Bank meeting and Friday's European Union summit.

Risk appetite grew after US researchers reported on Tuesday that an experimental vaccine for COVID-19 was safe and provoked immune responses. The optimism was undercut by escalating US-China tensions.

Euro zone bond investors were expected to remain cautious before Thursday's ECB meeting and the EU summit beginning on Friday.

Most analysts don't expect a policy change from the ECB, but messaging around whether the bank's emergency bond purchase "envelope" could be used in full will be closely watched.

At the summit, investors will watch for signs that a 750 billion-euro recovery fund that has boosted southern European debt could be approved soon.

But hawkish northern European states remain opposed to the grants that would make up most of the fund.

Spanish Prime Minister Pedro Sanchez said on Wednesday he saw "very difficult hours ahead" as he visited his Swedish counterpart for talks ahead of the summit.

"Bunds remain on a rollercoaster as risk sentiment seems torn between US new infections and vaccine hopes ahead of today's supply, tomorrow's ECB meeting and Friday's EU summit," Commerzbank strategist Rainer Guntermann told clients, adding that price action would remain "choppy" given low trading volumes.

Italy's 10-year bond yield fell to its lowest since late March in earlier trade at 1.25%. It was last unchanged at 1.28%. Germany's 10-year yield was also unchanged at -0.44% after falling 3 basis points on Tuesday.

Although the consensus is that the ECB will not adjust its policy, banks including Rabobank and ABN AMRO see a chance it could increase the amount of bank excess reserves it exempts from being charged the deposit rate at -0.50% - a tool to reduce their cost from negative interest rates.

The amount of non-exempt reserves has risen since the ECB upsized its bond purchases and a record take-up of cheap ECB loans last month.

ABN AMRO analysts believe the fall in the three-month Euribor rate, which is now at its lowest since mid-March, could help the bank raise the multiplier without putting pressure on interbank borrowing rates.

In the primary market, Germany raised 4.14 billion euros from the re-opening of its bond due August 2030, which it originally issued in June. This bond will be joined by a "green" twin in September, when Germany will issue its first green bond.