Italian 10-year government bond yield falls to record low as US election gridlock lingers

LONDON: Italian 10-year government bond yield fell to a record low on Friday as Southern European bonds were in demand on Friday as riskier assets were supported by the gridlock in the US presidential election.

Italian five-year yields were still in negative territory, after falling below zero percent for the first time on Thursday.

Lyn Graham-Taylor, rates strategist at Rabobank, said the overall risk-on mood supported Italian yields, but added that the Bank of Italy's buyback of five-year government bonds could also have been the reason for Italian yields falling by more than their peers.

Italy has bought back five bonds with maturities ranging from 2021 to 2023 for a total of 4 billion euros ($4.75 billion), the Treasury said on Friday.

The Italian 10-year BTP yield was down by 2.3 basis points at 0.610%, having fallen to 0.603% earlier, its lowest on record. Five-year Italian government bond yields fell 1.3 bps at -0.008%.

Yields were unfazed by the fact that Italian retail sales fell -0.8% in September from the month before.

Italy will continue issuing bonds dedicated to retail investors next year and beyond, the Treasury's head of debt Davide Iacovoni said on Friday.

Spanish yields also fell by around 1 bps, while those in Portugal steadied.

Democratic presidential candidate Joe Biden took a narrow lead over President Donald Trump in the battleground state of Georgia early on Friday, edging closer to winning the White House in a nail-biting contest as a handful of undecided states continue to count votes.

"The new political landscape may well prove supportive for risk assets," said ING analysts in a note to clients.

"As the US election vote proceeded at a snail's pace over the past two days, we observed a shift in the dominating narrative in financial markets. Risk assets have used that time to come to terms with a Biden 'lame duck' presidency, and some have even hailed it as the sweet spot," ING analysts said.

With Biden leading in results but seen now unlikely to win the Senate, there was a large unwind of bets on a Democratic sweep of both Houses, a so-called "Blue Wave".

As result, investors weighed prospects for big stimulus measures while cheering fading expectations of higher taxes and new regulations.

Benchmark 10-year German government bond yields were down by 1 bp at -0.641%.

US non-farm payrolls later in the day are set, according to economists polled by Reuters, to come in slightly weaker for October than for the previous month, albeit likely to be overshadowed by the uncertainty surrounding the election.