Italian bonds set for best week in two months

LONDON: Italy's bond market was poised for its best week in two months on Friday, even as borrowing costs edged up from four-and-a-half-month lows reached after this week's agreement on a European Union recovery fund to support economies hit hard by the coronavirus.

Bond yields across the euro zone rose after data showing euro zone business activity recovered in July and signs of rising US/China tensions prompted investors to take profits on this week's price gains and yield falls.

Italy's 10-year bond yield rose 4 basis points to 1.09%, still holding near Thursday's low around 1.04%.

In Germany, yields also rose from two-month lows after the euro zone flash Composite Purchasing Managers' Index (PMI), seen as a good indicator of economic health, rose to 54.8, its highest since mid-2018, and above forecasts. June's final reading was 48.5.

"The survey data suit our call for a tick-shaped recovery that involves a rapid, but partial, snap-back in economic activity as soon as economies re-open, followed by a slower sustained recovery thereafter that eventually reaches and exceeds the pre-COVID level of GDP some two to three years from now," said Berenberg senior economist Kallum Pickering.

Germany's Bund yield rose 3 basis points to -0.45%.

It briefly touched a two-month low in early trade around -0.50%.

Friday's selloff, however, still put just a slight dent in the prices gains in euro area debt markets this week.

Italian bond yields have tumbled 15 basis points this week and are set for their biggest weekly fall in two months.

According to Tradeweb data, 10-year Italian bond yields dipped below 1% on Thursday for the first time since March.

Spanish and Portuguese 10-year bond yields are down around 6 bps each this week, Greek yields have tumbled 10 bps.

EU leaders on Tuesday agreed to a 750 billion-euro recovery fund, which Italy's Prime Minister Giuseppe Conte said would allow his government to transform Italy.

Italy and Spain, two of the countries hardest hit by the pandemic, are also among the biggest beneficiaries of the deal.

In addition, aggressive stimulus from the European Central Bank and fiscal stimulus at a state level have boosted sentiment towards Europe. The euro is trading near 21-month highs.

"We think the Recovery Fund is a key ingredient for the European response to the shock. The ECB helps address the large funding needs but it can't replace every foreign investor in the periphery," analyst at BofA said in a note.