Italian bonds rally on coronavirus optimism, Macron's joint bond push

• Italy's two-year yields were down 11 basis points to 0.83pc, while the 10-year yield was last down 9 basis point at 1.76pc.
• The gap with German 10-year yields, effectively the risk premium Italy pays on its debt, was last at 222 bps, similar to levels seen on Thursday.

LONDON: Italian bonds were poised for a third day of gains on Friday as risk sentiment improved amid some encouraging news on the coronavirus pandemic and France expressed support for joint euro zone debt issuance.

Italy's two-year yields were down 11 basis points to 0.83pc, while the 10-year yield was last down 9 basis point at 1.76pc.

The gap with German 10-year yields, effectively the risk premium Italy pays on its debt, was last at 222 bps, similar to levels seen on Thursday.

A Chicago hospital is seeing rapid recoveries in coronavirus symptoms with the use of an antiviral drug, while US President Donald Trump laid out guidelines for states to emerge from economic shutdown. This has boosted risk assets, including stocks.

"We're seeing risk-on in general, so it could be a response to the general improved tone in the risk sentiment, on the combination of economies now gradually opening up or easing restrictions on the one hand and the news flow on drugs against corona also helps," said Commerzbank rates strategist Rainer Guntermann.

European countries have "no choice" but to set up a fund that "could issue common debt with a common guarantee", Emmanuel Macron told the Financial Times on Thursday. Failure to do so would lead to populists winning in Italy, Spain, and possibly France, he warned.

"France has been aligned towards some combinations in the crisis, but the very recent stance in the Eurogroup meeting has been a bit more neutral," Guntermann said.

"Now France is putting more weight apparently behind this push for combinations. could accelerate the drive into the meetings next week," he added, referring to a summit of EU leaders.

Euro zone finance ministers last week agreed a half-trillion-euro plan to support the bloc's coronavirus-hit economies. But the exclusion of using joint debt issuance to finance the economic recovery disappointed markets, leading to a sell-off on Italian bonds.

Without joint issuance, Italy will have to add to its already hefty debt, already nearly 135pc of gross domestic product, raising concern about the sustainability of its debt.

The country's budget deficit will be nearly 10pc of GDP this year, a senior government official told Reuters.

Despite a rally over the last three sessions, pressure remains and Italian yields are Italy's 10-year yield is still 16 bps higher than at the start of the week, as the impact of disaapointment with the Eurogroup's decision looms.

In a sign of a search for safety, 10-year German bund yields are set to close the week lower for the first time in three weeks, down 14 bps this week.

Italy will also offer a new inflation-linked bond next month as part of its efforts to raise funds as it confronts the economic impact of coronavirus.

Euro zone inflation slowed sharply in March to 0.7pc year-on-year, statistics showed on Friday confirming earlier estimates.

A key market gauge of long-term euro zone inflation expectations fell to a three-week low at 0.9466pc.