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Italy Bonds Lead Europe Rally as ECB Hints of More Stimulus

Italian Bond Rally Shows Bets EU Budget Punishment to Be Averted

(Bloomberg) -- Italian bonds led a European rally as hints of fresh stimulus from policy makers outweighed the impact of easing global trade tensions.

The securities surged Monday to send benchmark yields below 2% for the first time since May 2018, while German bund yields hit a fresh record low. European Central Bank officials gave signals that action may be on its way in an effort to revive the region’s inflation, while investors in Italy are growing confident Rome will avoid punishment from the European Union over its budget.

Italy Bonds Lead Europe Rally as ECB Hints of More Stimulus

Italian bonds have enjoyed a change of fortunes over the past couple of months as the more dovish rhetoric from the ECB combines with a more conciliatory attitude from the government in Rome. Officials, including the nation’s Finance Minister Giovanni Tria, have been adamant that spending will remain within the EU’s rules.

“Italy has given the Commission enough to stand down for now, and in any case the Council will not pick this fight now,” wrote Imogen Bachra and Giles Gale, strategists at NatWest Markets. “Markets are in desperate need of yield. Per unit of credit, Italy is very cheap.”

Benchmark 10-year yields dropped 15 basis points to 1.95%, adding to the debt’s four-week rally. NatWest recommended investors buy five-year bonds versus their German peers, to target that spread falling to 160 basis points, from 188 basis points currently. Ten-year German bund yields dropped three basis points to an all-time low -0.36%.

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Any immediate reduction of budget tension adds another reason to buy after ECB President Mario Draghi last month raised the prospect of a renewal of its asset-purchase program, for which Italy would be one of the biggest beneficiaries. ECB policy makers, including chief economist Philip Lane, Dutch Governor Klaas Knot and Spanish head Pablo Hernandez de Cos all signaled that more stimulus may be needed to combat flagging price rises.

A number of nations across Europe now have much of their debt yielding less than 0%, also pushing investors into riskier assets such as Italian debt.

“The rally is more evidence of what happens when core and semi-core markets become negative yielding in 10-year-and-longer maturities,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “Italian debt sustainability improves in a negative-yield regime.”

Italy’s cabinet is meeting Monday evening to approve an update to the budget to take into account the country’s better-than-expected fiscal performance in the first half of the year. Higher revenues and lower spending on welfare programs mean the 2019 deficit should stand at 2.1%, in line with previous commitments. That might be enough for the Commission, which has delayed a meeting scheduled for Tuesday to discuss Italy.

--With assistance from Alessandro Speciale.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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