Italian bond yields set for first weekly fall since March

Italian yields were set for their first weekly fall since March on Friday and other euro zone bond yields extended declines, supported by dovish comments from European Central Bank President Christine Lagarde.

Less than two weeks before the ECB's next policy meeting, Lagarde said that it was too early to discuss winding down the bank's pandemic emergency bond buying, helping further stabilise euro zone government debt following a recent selloff.

The bloc's bond yields have risen this quarter as COVID-19 vaccinations have accelerated, prompting uncertainty around when the ECB will slow those purchases.

Lagarde said the ECB was "closely monitoring" borrowing costs, a formulation that usually signals concern.

Yields on Italian bonds, a key beneficiary of the pandemic purchases and which had underperformed peers recently, fell further on Friday, with the 10-year yield down 4 basis points to 1.02% at 1258 GMT.

The 10-year yields are set to close the week down 5 bps, the first weekly fall since the week ending March 26.

The closely watched risk premium on German debt was down to around 115 bps on Friday, from nearly 125 bps earlier this week.

Other 10-year bond yields also extended their fall after Lagarde's comments. German 10-year yields, the bloc's benchmark, were down 3 bps to -0.14%, set for their biggest daily fall in 2-1/2 weeks.

Euro zone business growth accelerating above expectations, at its fastest pace in over three years in May, failed to dent Friday's bond rally.

"I think that we should be in for a period of stabilisation - spreads had moved too much in anticipation of higher inflation, ECB tapering etc.," said Jens Peter Sorensen, chief analyst at Danske Bank.

"But (the) ECB is still overflowing the market with cash and buying bonds, Federal Reserve is on hold , most of the (euro zone government bond) issuers have fulfilled more than 50% of the issuance target this year, we have fiscal consolidation with the EU recovery fund... So plenty of supporting factors going forward."

Analysts at Rabobank noted that real, inflation-adjusted yields have been rising while market inflation expectations have been falling, a scenario that implies an unwarranted tightening financial conditions. This decreases the risk of the ECB slowing its bond purchases in June, Rabobank said.

Later on Friday, Moody's will review Greece's credit rating, the lowest among the main rating agencies at three notches below investment-grade territory.

The review comes after S&P upgraded Greece in April, bolstering hopes of a return to investment-grade status.