German Bund yields rise on reflation bets, Italian yields down

MILAN: Germany's 10-year bond yields hit a five-month high on Monday on a more upbeat tone in world markets, while Italy's 10-year bond yield hovered close to one-month lows thanks to brighter prospects for a future government led by Mario Draghi.

Hopes that a $1.9 trillion aid package will be passed in the US as soon as this month, boosting growth and inflation, put upward pressure on core bond yields, especially in Germany, as a selloff in US Treasuries gathered pace.

Germany's 10-year bond yield was last up 2 bps on the day at -0.420%, having touched its highest level since early September at -0.412% in early trade.

Italy, which last week saw the biggest weekly fall in 10-year bond yields in months, remained in focus in the euro area.

While Draghi's route to power is still unclear, signs of support for the previous head of the European Central Bank from some of Italy's biggest parties - the anti-establishment 5-Star Movement and rightist League as well - underpinned Italy's bonds.

Its 10-year bond yield was slightly down at 0.533% , not far from the almost one-month lows hit on Friday.

Currently, the yield is just 6 basis points away from record lows hit late last year at 0.472%. The gap over benchmark 10-year Bund yields was around 95 bps -- close to its tightest levels in five years.

The strong performance of Italian bonds in the past week could encourage the country's Treasury to launch new syndicated deals in the near future, UniCredit analysts said in a note.

"We continue to expect a deal in the 30-year area, with the Treasury either issuing a new benchmark or reopening BTP 1.7% Sep51 via syndication. As an alternative, Italy might also consider to issue a new 50-year BTP," the bank wrote in a note.

ING also said syndicated sovereign bond deals could still come in the week head including from Spain and Italy.

Italy's Treasury is due to announce later in the day the details of its BTP auction due on Thursday.

In Germany, industrial output stagnated in December in the wake of lockdowns, data showed on Monday.

"Stagnation in December increases the risk that industrial production will not be able to save the economy from contraction in the first quarter," wrote ING in a report.

Lockdowns weighed on euro zone investor morale, which unexpectedly fell in February, a survey showed on Monday.

ECB President Christine Lagarde is due to speak before the European Parliament later in the day.