September 7, 2018 / 8:10 AM / 2 months ago

No stopping Italy's bond rally as yields tumble to one-month lows

* Italy stands out as euro zone bond market outperformer

* Italian Treasury to hold bond buyback

* Most other euro zone debt yields higher

* U.S. jobs data in focus

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

By Dhara Ranasinghe

LONDON, Sept 7 (Reuters) - Italy’s borrowing costs fell to one-month lows on Friday, setting up the bond market for its best week since June thanks to easing concern over fiscal largesse from the new anti-establishment government.

Short-dated Italian bond yields have fallen more than 50 basis points this week after reassuring comments from senior members of the government suggested that Rome will respect European Union rules on fiscal discipline.

A buyback of Italian debt could be the icing on the cake for what has been a stellar bond market rally this week.

Italy’s Treasury said on Wednesday that it would offer to buy back four bonds from investors on Friday, adding to similar deals in recent weeks to help to stabilise a bond market battered by concerns about the new government’s spending plans.

“When they announced this buyback there was also a positive turnaround in investor sentiment related to constructive budget talks, so there is a combined boost to the bond market,” said UniCredit bond strategist Luca Cazzulani.

“Whether the positive market tone continues depends on the statements and tone in the budget discussions; this is the most important thing.”

Italy’s 10-year bond yield fell more than 7 basis points (bps) to 2.83 percent, its lowest in a month. It has fallen 40 bps this week, its biggest weekly fall since June and one of its biggest weekly drops since the euro zone debt crisis.

That has left the closely watched gap over top-rated German Bund yields at about 244 bps, close to its tightest in a month.

Italian two and five-year bonds yields have fallen by more than 50 bps this week in their biggest weekly fall since June.

The recovery in Italian debt has also dented the appeal of safe-haven German bonds, with short-dated German bond yields up about 5 bps this week at minus 0.58 percent and set for their biggest one-week rise since February.

Most bond yields in the euro area were slightly higher on the day, leaving Italy as the clear outperformer.

Analysts say that the rally in Italian debt prices also represents some covering of bearish positioning and a relentless hunt for higher-yielding assets from investors.

Focus was expected to turn to U.S. jobs data later in the session for clues on the outlook for the world’s biggest economy.

Economists polled by Reuters have forecast that the U.S. economy created 191,000 new jobs in August, compared with 157,000 in July.

Reporting by Dhara Ranasinghe Editing by David Goodman

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