LONDON: Investors retreated to the safety of German government bonds on Thursday, pushing down yields, as the effects of a brutal selloff on Wall Street made themselves felt across the world.
Italian yields were a touch higher ahead of a key set of auctions, as market participants try to evaluate the country's debt sustainability in the face of a high-spending budget plan and a recent sharp rise in borrowing costs.
US stocks tumbled on Wednesday, with the S&P 500 and the Dow marking their biggest daily declines since Feb. 8, prompting US President Donald Trump to criticise the Federal Reserve.
The rout triggered a flight to safety bid, and the yield on better-rated euro zone government bonds -- which move inversely to price -- were all between four and five basis points lower.
German government bonds, seen as one of the safest and most liquid assets in the world, were at the forefront of this demand, with 10-year yields dropping six basis points to a one-week low of 0.49 percent before settling at around 0.51 percent.
This came after US Treasury yields dropped about eight basis points to 3.15 percent, coming off a seven-year high hit earlier this week on rate hike expectations.
This yield could be buffeted either way later on Thursday, with US inflation data due at 1230 GMT.
"It remains to be seen whether the accelerating equity plunge is a healthy correction or the tip of the iceberg," Commerzbank analysts said in a note. "For sure it creates a more challenging environment for today's (Italian) auctions."
KEY AUCTION
Short-dated Italian government bond yields were higher ahead of a key set of auctions. Two-year yields were up one basis point to 1.70 percent and five-year yields were five bps higher at 2.92 percent.
This discrepancy is likely linked to the maturity of the debt Italy plans to sell later on Thursday. Its debt agency will look to raise up to 6.5 billion euros from the auction with 3-3.5 billion euros targeted to come from a three-year bond sale.
This auction will give investors an indication of how costly the recent sharp rise in Italian borrowing costs will prove to Italy's public finances.
Italian yields are trading near four-year highs after the new anti-establishment government's spending plans put the country on a collision course with Brussels and raises questions over the sustainability of public finances.
"The key issue for Italy is debt sustainability, so that's why the results of the auction are important," said Arnaud-Guilhem Lamy, a portfolio manager at BNP Paribas Asset Management.
"It's important to see what the demand is like, and what sort of yields the bonds will sell at and the difference between the yields of the different bonds as well."
The Italy/Germany 10-year bond yield spread, often used by investors as a proxy for euro zone sentiment, has been in focus as it has widened to as much as 316 bps earlier this week, well over double what it was in April.
Italian Deputy Prime Minister Matteo Salvini said last week the government would not change its deficit targets even if the gap widens to 400 basis points.
On Thursday it widened once again to 303 bps, with Italy's 10-year yields rising three bps.
Comments
Comments are closed.