UPDATE 1-Italian bond yields rise 5-10 bps before euro zone finmin meeting
* 10-year Treasuries and Bunds remain pinned to Friday’s highs
* Risk appetite improves after more stable equity sessions
* Reports of TLTRO extension lead to early dip in core yields
* (Updates pricing, recasts to reflect improved market sentiment, adds quote)
By Virginia Furness
LONDON, Nov 5 (Reuters) - Italian government bond yields rose 5-10 basis points on Monday before a euro zone finance ministers’ meeting that will discuss Rome’s budget plans, while German yields were flat to weaker as investors remained cautious on taking on risk.
Italian debt markets stayed under pressure ahead of the Eurogroup meeting. The ministers will meet to discuss deeper euro zone integration and are expected to address the opinion issued by the commission concerning Italy’s draft budgetary plan. Most analysts do not expect market moving developments but markets remain jittery nevertheless.
“Italy is going to fall into the background,” said Jan von Gerich, fixed income analyst at Nordea. “The Commission won’t do anything else but talk tough, and even if they have the balls to bring in sanctions it would be late spring anyway.”
Two-year Italian bond yields were 12 basis points higher to 1.19 percent, while 10-year bond yields rose five bps . Italy’s yield spreads over German counterparts - effectively a measure of Italian risk - widened 8 bps to 292 bps.
On Friday the European Banking Authority (EBA) completed its health check of the region’s systematically important banks, concluding that none of the 48 lenders failed a major capital threshold.
The EBA identified Italy’s Banco BPM as one of the banks that fared the worst in its Europe-wide stress test.
The global backdrop also was not conducive to risky securities, as doubts arose about mooted China-U.S. trade talks, world stocks stayed under pressure and investors focused on Tuesday’s U.S. mid-term elections and a Fed meeting on Wednesday.
That kept yields on 10-year German and U.S. government bonds - seen as safe assets - stayed below the highs touched on Friday when upbeat U.S. jobs figures reinforced bets on more interest rate hikes by the Federal Reserve.
A weak European share market opening after a lossmaking Asian session saw Germany’s 10-year government bond yield, the benchmark for the euro area, slipping at open to trade as low as 0.412 percent. But yields inched off session lows as European shares clawed back some losses.
Other core euro zone bond yields also rose modestly to trade around flat, having opened one to two basis points lower
“We’re seeing slight better risk appetite, meaning the imminent fear of equity market melt-down has receded,” said Peter Chatwell, rates strategist at Mizuho. “This might help investors have a more constructive outlook, and there will be some taking off of Treasury and Bund long positions.”
Chatwell said the early bid for safe assets had been driven also by reports on Friday that the European Central Bank could extend its programme of targeted longer-term refinancing operations (TLTRO) which includes cheap loans to banks.
However, three sources close to the matter told Reuters that a new round of cheap ECB loans is not imminent, as policy makers see little need to pump more cash into the banking system at a time when lending and inflation are picking up.
Chatwell agreed this was a “low probability” but the outlook is not rosy for the region and after a slew of weak data last week, a survey of investor sentiment showed that morale in the euro zone fell more than expected in November.
The Senix investor sentiment index fell to its lowest level in just over two years, as concerns about U.S. trade policies and the future of Germany’s car industry weighed on sentiment.
Reporting by Virginia Furness Editing by Raissa Kasolowsky
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