CORRECTED-EURO GOVT-Italian yields steady around post-election lows

Thu Apr 11, 2013 4:26am EDT

Related Topics

(Corrects surname in 11th paragraph)

* Italy to sell 5.5-7.5 bln euros worth of bonds

* Yield-hungry bidders expected to snap up bonds

* Bunds, Italian bonds steady; French yields resume fall

By Marius Zaharia

LONDON, April 11 (Reuters) - Italian bond yields held steady on Thursday before a debt auction expected to draw solid demand as investors seek higher-yielding assets on prospects of further monetary easing by major central banks.

Expectations for a European Central Bank rate cut and the Bank of Japan's plans to print unprecedented amounts of money to stimulate the economy have pushed investors to take on more risk in recent days in search of higher returns.

Italian 10-year yields, down more than 50 basis points since late March, held at 4.3 percent, near their recent lows, and some 15 bps lower than the session before the country's inconclusive Feb. 24-25 elections.

Usually yields tick higher in secondary markets before a country sells debt as investors make room in their books for the new supply, but Italian bonds stayed strong.

The heavily indebted euro zone member, which is still struggling to form government, will offer 5.5-7.5 billion euros of a new three-year bond, a 15-year bond and a five-year floating rate note later in the day.

Investors doubt Japanese investors trying to switch into higher-yielding, non-yen assets will be willing to take the risk of holding Italian bonds given the political crisis there.

However, the anticipation of flows from Japan to assets elsewhere in the euro zone is seen making Italian yields attractive compared with those of other bonds in the region.

This continues to fuel demand for Italian debt from investors relying on the ECB's as yet untested bond-buying programme to protect them in case sentiment turns.

"I don't think Italian bonds are profiting from the Japanese argument," said Mathias van der Jeugt, rate strategist at KBC.

"But the ECB and the 'Draghi put' remain a supporting factor," he said, referring to ECB President Mario Draghi's pledge to do whatever it takes to save the euro.

Van der Jeugt sees Italian 10-year yields falling towards 4 percent, and says about 17 billion euros of debt redemptions and coupon payments next week should ensure a smooth auction.

SLEEPING VIGILANTES

The strong performance of Italian bonds despite the political uncertainty and the weakening economic fundamentals is puzzling many analysts.

"The market seems to me overly complacent," said Alan McQuaid, chief economist at Merrion Stockbrokers. "I'm a bit uneasy with the whole thing. It is why we got in this mess in the first place - bond vigilantes were asleep."

After pulling away from record lows recently as the market had to absorb new debt supply, French, Belgian, Austrian and Dutch yields resumed falling on Thursday as investors anticipated demand from buyers outside the euro zone.

French 10-year yields were 3 bps lower at 1.835 percent.

In Germany, Bund futures were flat at 145.35. (Editing by Nigel Stephenson)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.