Italy’s Bonds Cap Pandemic Turnaround With Yields at Record Low

(Bloomberg) -- A rally in Italian bonds sent benchmark yields to a record low as political risks are fading and the debt has backing from European institutions.

The country’s 10-year yield slid to an all-time low of 0.712% Friday. The rally marks a sharp turnaround for one of the region’s riskier markets, less than seven months after yields climbed to a high just shy of 3%.

The debt is on track for a sixth straight week of gains, buoyed most recently by hopes of political stability following local vote successes for Prime Minister Giuseppe Conte. Italy’s bonds were the euro area’s best performers during July-September, underpinned by the European Central Bank’s stimulus and the prospect of fiscal support from the European Union.

“It seems Italian bonds are in a sweet spot right now,” said Martin van Vliet, a strategist at Robeco Institutional Asset Management. “The hurdle of political risk has been overcome, virus developments in Italy seem less unfavorable than in some other European countries such as Spain, the net supply pressure is easing, and expectations for further ECB action are on the rise.”

Italy’s 10-year bond yield premium over Germany -- a key gauge of risk for the nation -- has fallen to pre-pandemic levels, even with a resurgence of the virus that threatens to upend the fragile economic recovery. The debt saw a dramatic sell-off in the first quarter after Italy was the first in Europe to trigger a lockdown to contain the coronavirus.

Shrinking Spread

The yield differential touched 125 basis points Friday, the narrowest since May 2018, after declining 32 basis points last quarter in the biggest such drop in a year. The spread may narrow further given Italy’s changing risk perceptions and continued support from policy makers, according to Christoph Rieger, head of rates strategy at Commerzbank AG, who targets a move to 115 basis points.

Italy’s government also saw its lowest ever borrowing levels in an auction of 12-month Treasury bills Friday, which were sold at an average yield of minus 0.436%.

The country’s peripheral bond peers advanced given the supportive backdrop. Greece’s 10-year yield fell to a record low at 0.862% Friday, a far cry from the 44.2% it reached at the height of the debt crisis in 2012. Spain’s benchmark yield fell to 0.138%, the lowest since October, after the Treasury announced that just a single bond, a new five-year maturity, will be sold next week. Portugal’s 10-year yield slid to 0.146%, which was also the lowest since October.

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