Italian Bond Yields Fall to Record Low as Investors Back Draghi

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A rally in Italian bonds sent the country’s borrowing costs to a record low amid optimism Premier-designate Mario Draghi will push for key structural reforms once he forms a government.

The yield on 10-year government debt fell to 0.5%, dropping below the previous low set last month. Former European Central Bank President Draghi, who helped rein in Italy’s debt risk from the euro-area crisis nearly a decade ago, has won near-unanimous support from across the political spectrum following the collapse of the previous coalition. He told lawmakers Monday that a common euro-area budget will be one of his key priorities.

“Draghi could be a change of regime for Italian politics, being pro-EU and pro-reforms,” said Imogen Bachra, European rates strategist at NatWest Markets. That “could also mean a paradigm shift for Italian bonds,” with the spread over German bunds breaking through 2015 lows, she added.

Italian Bond Yields Fall to Record Low as Investors Back Draghi

Italy’s markets have rallied over the past year thanks largely to enormous bond-buying support from the ECB, which has helped to insulate the nation from its soaring debt levels. The possibility that Draghi will become the next prime minister has boosted the bonds further.

Draghi’s reputation as a technocrat and pragmatist also sent the spread over German bonds -- a key metric of political risk -- to 96 basis points, the lowest level in five years. Bachra said it could break below 90 basis points given that the last time bonds were in a higher-yield environment.

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