LONDON: Long-dated Italian government bond yields rose 7-9 basis points on Wednesday after the country's debt office announced a surprise 20-year bond sale, looking to take advantage of hefty demand for euro zone debt.
The deal, announced late on Tuesday, will be a test of market appetite for Italian bonds at a time when the European Union is expected to take disciplinary action against Rome over the country's growing debt.
"Right now, the carry and the ECB monetary easing is cancelling out the negative headlines. It will be interesting to see whether this will continue, especially given the expected Eurogroup decision on whether or not to open up sanctions on Italy," said DZ Bank strategist Daniel Lenz.
"Carry" refers to a trade where investors take advantage of low short-dated borrowing costs to pick up some yield by buying longer-dated debt.
"You also have the domestic political uncertainty, with (Giuseppe) Conte threatening to resign if the coalition partners don't find a solution with the Commission," Lenz added, referring to comments made by the Italian premier last week.
Italy's 10-year government bond yield was up 7.5 basis points at 2.38%, while longer-dated 20- and 30-year yields
were up about 8 basis points each.
Yields usually rise ahead of a sale, with investors selling outstanding debt to make space for the new supply.
But the move comes after a strong rally in recent days, which saw Italy's 10-year yield drop 30 bps in the first week of June, touching a one-year low of 2.28% in the process.
Spain could also hit the bond markets on Wednesday, having announced a 10-year syndicated bond deal in the previous session. This would pose a different question for investors: how willing they would be to take on Spanish debt at record low yields.
But Lenz of DZ Bank said he expects demand to be strong nevertheless. "Spanish yields have hit record lows, but there is still a positive carry and it does not include the risk you have on Italy, so I would be very surprised if investors stay absent," he said.
Spain usually launches a 10-year bond sale around this time of the year, so the market reaction was muted, with the country's benchmark 10-year yield unchanged at 0.58%.
Elsewhere, German 10-year bond yields, the benchmark for the bloc, dropped to minus 0.24%, close to record lows hit last week, as concerns about the global economy grow in the shadow of a trade dispute between its two largest economies.
U.S. President Donald Trump on Tuesday defended the use of tariffs as part of his trade strategy while China vowed a tough response if the United States insists on escalating trade tensions amid ongoing negotiations.
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