Italy bond yields fall as much as 20 bps, amid talk of intervention

• Euro zone finance ministers last week agreed a half-a-trillion-euro plan to support coronavirus-hit economies.
• Two other market sources also noted talk of intervention in markets. There was no immediate confirmation from the Bank of Italy.
• ECB board member Isabel Schnabel said the bank was ready to do more to avoid financial fragmentation in the euro zone.

LONDON: Italian government bond yields fell across the curve on Thursday, with two-year yields down as much 20 basis points, sparking renewed speculation of European Central Bank intervention to tamp down borrowing costs.

Yields had risen the previous day amid disappointment with the Eurogroup's response package and changes to its funding programme, which increased the prospect of Rome adding to its already huge debt.

Euro zone finance ministers last week agreed a half-a-trillion-euro plan to support coronavirus-hit economies.

But they failed to mention using joint debt to finance the economic recovery, a measure countries like Italy had called for.

Yields got back some of that rise after a document showed additional support could be incorporated into the next long-term budget for the bloc -- the Multiannual Financial Framework (MFF), currently under negotiation.

They then extended their decline, with two-year yields falling as much as 20 basis points to 0.86pc, having risen on Wednesday as high as 1.15pc.

Ten-year yields fell more than 15 bps to a session low of 1.735pc while the premium investors demand to hold Italian bonds over German equivalents tightened 10 bps to around 216 bps. That spread had ballooned above 240 bps during Wednesday's selloff.

"I suspect they (the ECB) are intervening because they have seen early signs of fragmentation between Italy and other countries this week," said Frederik Ducrozet, global strategist at Pictet Wealth Management.

Investors had noted the prospect of intervention on Wednesday, when Italian yields rose back towards levels seen around the time the ECB offered its PEPP emergency stimulus programme.

Two other market sources also noted talk of intervention in markets. There was no immediate confirmation from the Bank of Italy.

The ECB does not publish details of what it is buying under its emergency bond purchases, meaning market players can only speculate about its presence in markets on any one day or time.

Other southern European bonds slipped too but Spanish 10-year yields were down just 4 bps at 0.83pc. German 10-year yields were steady around 0.45pc.

Some analysts also attributed the mood about-turn to Italian media reports that the ruling coalition may be more amenable to using the ESM bailout facility, which parties had been bickering over.

ECB board member Isabel Schnabel said the bank was ready to do more to avoid financial fragmentation in the euro zone.