Italian bond yields drop, spread below 100 bps

MILAN: Italian government bond yields dropped on Thursday as investors focused on former European Central Bank chief Mario Draghi's efforts to form a new government, while German borrowing costs edged higher as market sentiment remained upbeat.

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.

As Draghi started consultations, the largest party in parliament, the 5-Star Movement, softened its initial hostility to his appointment.

Longer-term US Treasury yields were higher on Thursday as investors positioned for a large pandemic relief package from Washington and a stabilising US labour market.

Investors are "waiting for further developments on the (Italian) government crisis," said Luca Cazzulani, co-head of strategy research at UniCredit.

Italy's 10-year government bond yield was down 3 basis points at 0.557%, after falling 7 basis points on Wednesday. The closely-watched gap between German and Italian government bond yields dipped to 99.9 basis points, below 100 bps for the first time since January.

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

The rise, due to one-off factors, was led by Germany and Netherlands and sent a gauge of longer-term inflation across the 19 countries that use the euro to the highest since May 2019, above 1.38%.

The data, alongside the Draghi news, sent cash flowing from German debt into southern Europe.

For Bunds "the overall macro- and risk-backdrop argues for further bearish steepening, which we also expect during H1", Commerzbank analysts said.

The 10-year Bund yield rose 1 basis point to -0.45%, after earlier hitting the highest level since September at -0.442%. The 30-year Bund yield was in positive territory for the first time since September, at 0.003%.

British government bond yields rose 7 basis points to their highest since March as investors heavily scaled back bets the BoE would implement sub-zero rates this year.

Britain's banks would need at least six months to prepare for any cut in interest rates below zero, the Bank of England said on Thursday as it kept stimulus programmes on hold ahead of what it hopes will be an economic recovery later this year.