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Markets

Italian bond yields fall as ECB hints at December stimulus

  • The European Central Bank left policy unchanged at a meeting on Thursday as expected, but provided the clearest hint yet of fresh easing at its next meeting in December.
  • "The door for December action is wide open."
29 Oct 2020

AMSTERDAM: Italian bonds recovered on Thursday as markets stabilized after lockdowns in France and Germany hit risk assets a day earlier and as the ECB hinted at providing additional stimulus in December.

The European Central Bank left policy unchanged at a meeting on Thursday as expected, but provided the clearest hint yet of fresh easing at its next meeting in December.

The ECB warned that the pandemic posed risks to economic growth and it would reassess whether more support is needed at its Dec. 10 meeting, when new projections become available.

"The ECB's press statement points to the December meeting, which will have a new round of macroeconomic projections and will enable the ECB to 'recalibrate its instruments, as appropriate, to respond to the unfolding situation...'," said Carsten Brzeski, global head of macro at ING.

"The door for December action is wide open."

After a hefty sell-off on Wednesday, when new lockdown announcements in France and Germany hit risk assets, Italian bonds recovered following a 6.5 billion euro ($7.68 billion) bond auction and yields extended their fall following the ECB's decision.

They were last down 4 basis points on the day to 0.72% .

The spread between Italian and German 10-year bond yields - effectively the risk premium on Italian debt - tightened to 135 basis points after hitting its widest in a month in earlier trade at around 140 basis points.

Germany's 10-year yield was down 1 basis point on the day at -0.64%, still near its lowest since March at -0.646%, which it reached on Wednesday.

Greek bonds, rated junk and only eligible for ECB emergency bond buying, also recovered, with the 10-year yield down 1 basis points to 1.03% after rising to its highest in nearly a month at 1.084% in early trade..

At the ECB's press conference at 1330 GMT, investors will closely watch President Christine Lagarde's comments for further clues that the bank is likely to expand its pandemic emergency bond-buying programme, which most investors expect in December.

The lockdowns announced in recent days and their impact on riskier assets mean expectations for some kind of pre-commitment from the ECB have risen in recent days, according to Piet Christiansen, chief analyst at Danske Bank.

The risk is markets will be disappointed, Christiansen said, since the ECB is likely to continue watching incoming data and its Governing Council is divided between hawkish and dovish policymakers.