Italian Bonds Are Enjoying a New Start After 2018's Market Rout

(Bloomberg) -- Italian bonds are showing signs of leaving last year’s troubles behind them.

Yields on five-year bonds touched their lowest level in six months Thursday, as investors shrug off the risk of political turbulence and slowing regional growth to grab rates twice that of neighboring Spain. The securities have rallied as foreign buyers returned to snap up debt at the nation’s sale this week, which saw orders more than triple the amount offered.

Italian Bonds Are Enjoying a New Start After 2018's Market Rout

The rally is a far cry from the panic selling seen in markets at times last year, when the country’s populist coalition government set out to increase its fiscal deficit, putting it in conflict with the European Union’s fiscal rules and leading to credit rating downgrades. The subsequent rapprochement with the EU on the budget helped turn around sentiment.

That Italy has already sold nearly 20 billion euros of bonds -- around 8 percent of its total funding needs for the year -- has also provided investors with some relief.

“Don’t miss the party,” said Danske Bank A/S strategist Arne Lohmann Rasmussen, adding that the nation’s successful debt sale combined with more positive global sentiment was a good “cocktail” for Italian debt.

Italian five-year bond yields fell as much as 3 basis points on Thursday to touch 1.61 percent, the lowest level since July. The 10-year yield spread over Germany, seen as a barometer of market risk, was at 251 basis points, approaching a three-month low.

“The post-supply BTP rally is an encouraging sign,” wrote Peter Chatwell and Antoine Bouvet, strategists at Mizuho International Plc, who recommend a curve steepening trade in the face of fading risks.

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