Euro zone bond yields steady, Italy takes a breath after Draghi effect

MILAN: Italian government bond yields held near two-week lows on Thursday after steep falls on the previous day as investors focused on former ECB chief Mario Draghi's efforts to form a new government.

Other euro zone markets were quiet, though Germany's 30-year borrowing costs briefly turned positive and euro zone forward inflation swaps extended their recent rise.

Markets had cheered the prospect of Draghi, the trusted former central banker, taking over at a time when debt-laden Italy is grappling with a pandemic and a deep recession. But Draghi still needs to win backing from parties across the political spectrum to get a government off the ground.

"After Wednesday's rally, Italian BTPs are flat, with investors in a 'wait and see' mode waiting for further developments on the government crisis," said Luca Cazzulani Co-Head of Strategy Research at UniCredit.

Italy's 10-year government bond yield was down 2 basis point at 0.572%, after falling 7 basis points on Wednesday. The closely-watched gap between German and Italian government bonds yields was at 103 basis points, having closed Wednesday around 105 bps.

Cazzulani added that bond markets also appeared to be digesting the 0.9% jump in January euro zone inflation reported on Wednesday.

The rise, while due to one-off factors, was led by Germany and Netherlands and sent a gauge of longer-term euro zone inflation to the highest since May 2019, above 1.38% .

The data, alongside the Draghi news, sent cash flowing from German debt into southern Europe. Earlier on Thursday, Germany's 30-year government bond yield traded in positive territory for the first time since September 2020 at 0.012%.

It later fell back to -0.010%, flat on the day.

The 10-year Bund yield rose one basis point at -0.467%, after earlier hitting the highest level since September at -0.451%.

Traders were awaiting the Bank of England's interest rate decision at 1200 GMT. Though it is expected to hold rates steady, its views on Britain's economic recovery and on the prospect of negative rates will be monitored.

New bond supply continued to hit the market. France sold 11 billion euros in four bonds via auction and Spain assigned four notes, raising around 6 billion euros.