April 28, 2020 / 7:55 AM / a month ago

Euro zone bond yields slip; Italian-German spread narrows

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, April 28 (Reuters) - Euro zone bond yields fell on Tuesday, with the benchmark German government bond yield down around one basis point as a renewed decline in oil prices overshadowed optimism about the easing of lockdown measures globally, increasing demand for safer assets.

Oil futures slumped after the largest U.S. oil exchange-traded fund said it would sell all its front-month crude contracts to avoid further losses as prices collapse.

Italian government bond yields extended Monday’s falls as investors continued to show relief after S&P kept Italy’s credit rating stable at two notches above junk on Friday, even though the country expects to be among the worse hit by coronavirus in Europe.

Italy’s 10-year government bond fell 6 basis points, hitting fresh two-week lows, while the spread between German and Italian 10-year government bond yields narrowed by as much as 6 basis points to 214.1 bps - its narrowest in nearly two weeks.

Rene Albrecht, rates strategist at DZ bank, said Italian yields’ extended fall was due to both S&P’s rating decision on Friday and because the Italian government has laid out plans for a cautious re-opening of the economy.

But, he said, Italian debt does not present a particularly attractive prospect for investors.

“We are not that bullish on BTPs (Italian government bonds), we still see potential for spread widening because of the trouble getting a consensus in Europe on how to help the most troubled countries,” he said.

“And of course the starting point for Italy before the coronacrisis was the worst of all the European countries. They had the highest debt and the lowest growth... So of course there is some caution among investors because they were on the troubled path before and now this path won’t get any easier.”

Major central banks have responded to the economic slump caused by the coronavirus by slashing interest rates, buying more government debt, and taking steps to increase lending to small companies.

The European Central Bank (ECB) meets on Thursday and is expected to expand its emergency debt purchases soon. It may also consider including junk bonds in its asset purchase programme, some analysts said.

“The likelihood is that the ECB will further step their firepower up in order to continue to support the weakest elements of the bloc,” Mizuho rates strategists wrote in a note to clients.

“Additional ECB easing at their meeting will most likely come in the form of broadened or enlarged asset purchases,” they said. (Reporting by Elizabeth Howcroft; Editing by Christopher Cushing)

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