Italy government

“Flight to Yield” Boosts Demand for Italian Government Bonds

* Eurozone periphery government bond yields

LONDON, Jan 29 (Reuters) – Italy’s 10-year bond yield fell to its lowest level since mid-October on Wednesday as appetite in global markets improved and concerns subsided. regarding Italian political risks has kept investors interested in the bloc’s higher-yielding bond markets.

After falling sharply in recent sessions, yields on German Bund safe-haven yields edged up to -0.36% – from three-month lows hit on Tuesday.

Fears about the economic impact of the coronavirus outbreak in China have boosted demand for fixed income securities over the past week.

Peripheral government bonds, which often trade in line with other riskier assets, however, outperformed even on days when stocks sold off.

Commerzbank analysts say ‘flight to yield’ dominates ‘flight to quality’ – a phrase that describes the rush to the highest rated and safe assets in times of uncertainty.

With more than half of the Eurozone government bond market in negative yield territory, sell-offs or auctions tend to be viewed as an opportunity to buy bonds offering any yield.

Greece drew record orders for a 15-year bond sale on Tuesday. France also received strong demand for a 30-year bond sold through a syndicate of banks on Tuesday, with demand reaching 38 billion euros ($42.16 billion) for the 5 billion euro offer.

French 30-year bond yields are at 0.69%

An improvement in Greece’s rating on Friday and the failure of the right-wing Italian League to win a key regional election this weekend, bringing relief to a beleaguered government, also boosted sentiment towards southern bonds. ‘Europe.

“The negative yield backdrop and the idea that this is going to last for some time means that the traditional investor base is reluctant to stay in the German bond market,” said Rainer Guntermann, rates strategist at Commerzbank.

“In the periphery there are country-specific factors – the weekend elections in Italy, the credit rating upgrade in Greece.”

The yield on Italian 10-year bonds fell 3 basis points to 0.994%, its lowest level since mid-October. The closely watched spread between Italian and German Bund yields narrowed to around 134 basis points – its tightest since September.

Analysts at Mizuho said they believe the spread could tighten further, adding that Italian 30-year bond yields could fall to 1.5% from current levels of around 2%.

Trading in Eurozone bond markets is expected to be generally subdued ahead of a rate decision by the US Federal Reserve later in the day.

The Fed is widely expected to keep rates unchanged, but officials will likely discuss possible changes in how they manage the U.S. central bank’s overnight borrowing rate. ($1 = 0.9014 euros) (Reporting by Dhara Ranasinghe; Editing by Andrew Cawthorne)