Italian bonds lead rally in periphery as core rates hold firm

LONDON: A rally in peripheral euro zone bonds gathered momentum on Thursday, bolstered by successful bond sales from Italy and Spain and extending to Greece after prime minister Alexis Tsipras survived a no confidence vote in parliament.

Markets opened without much direction in early trade amid uncertainties such as the outlook for Brexit and the US shutdown, but as trading wore on the periphery began to outperform.

Italy's government bond yields fell the most and were down up to 6.5 basis points across the curve. The buying momentum was largely driven by follow on demand after Italy's 10 billion euro bond sale on Tuesday.

Italy's five year bond yield had already fallen 13.5 basis points Wednesday, its biggest one-day decline in over a month , and extended those falls by 6.5 basis points to a new six-month low of 1.572 percent. Italy's two-year bond yield reached its lowest point since the May 29 sell off, at 0.273 percent.

"The very successful sale on the benchmark has contributed to this rally, when you consider that one of the main sources of concern has been whether Italy will be able to attract investors in 2019," said UniCredit rates strategist Luca Cazzulani.

"Having said so, there are still elements of uncertainty. It is short term reaction. When you look at the short end -- it offers a very large amount of carry."

GOOD FOR GREECE

Greek government bond yields also fell to new lows on Thursday after Prime Minister Alexis Tsipras won a confidence vote in parliament triggered by Greece's approval of an accord to end a dispute over Macedonia's name. His narrow victory averted a possible snap election.

Greece is widely expected to return to the debt markets in the coming weeks, with Italy's deal likely to provide confidence for the southern European nation.

EU Economics Commissioner Pierre Moscovici said on Wednesday that Greece should regain full access to the debt markets and all efforts should be made to that end.

Greece's five-year government bond yield slipped to its lowest level since September at 3.087 percent.

Spanish debt also benefited from the stronger risk appetite which saw investors soak up 4.6 billion euros of new supply.

Its 10-year government bond yield fell to 1.34 percent, its lowest since December.

BREXIT BORE

Elsewhere, core euro zone bond markets have taken their cue this week from Britain, where gilt yields rose on Wednesday after the parliament rejected Prime Minister Theresa May's withdrawal agreement with the European Union.

May then survived a no-confidence vote on Wednesday night but uncertainty over the passage of Britain's exit from the EU rumbles on.

Peter Chatwell, rates strategist at Mizuho said that any optimism on UK politics was "sorely misplaced".

"There is uncertainty in the gilt market and that feeds into core euro zone government bonds as well," he said. "Bunds are just as sensitive to it as gilts."

Germany's 10-year government bond yield, the benchmark for the region, opened 1.6 basis points lower at 0.207 percent, before turning flat on the day. Other 10-year bond yields in the euro zone were flat to 1.5 bps lower., .

Markets were largely unchanged after data confirmed preliminary estimates that euro zone inflation had slowed in December to 1.6 percent.

"The final CPI came in line, which confirms the headline (number) is now suffering because of weaker commodity prices and the drop out of positive base effects," said Chatwell.