Euro zone bond yields fall, Italian-German spread below 200

　　div classBodysc17zpet90 cdBBJodivpBy Stefano Rebaudop

　　pReuters – Euro zone borrowing costs fell sharply on Tuesday as investors covered short positions after recently pushing yields to multiyear highs on aggressive European Central Bank tightening bets.pdivdivdiv classBodysc17zpet90 cdBBJodiv

　　pMeanwhile, the spread between Italian and German 10year rates narrowed below 200 bps.p

　　p“The mediumterm trend doesnt change, but with the U.S. yield at 3, Bund at 1.1 and Italian BTPs at 3, it makes sense to cover short positions, which is what is happening right now,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.p

　　pSome analysts reckon markets might have gone too far in pricing in ECB monetary tightening but bonds remain vulnerable to further selloffs as the central bank recently sounded more hawkish, doing little to soothe investors angst.p

　　pThe European Central Bank should raise interest rates in July to stop high inflation from getting entrenched, Bundesbank chief Joachim Nagel said on Tuesday, joining an already long line of policymakers calling for quick rate moves.p

　　pThe 10year Bund yield, the blocs benchmark, fell 8.5 basis points bps to 1.007. On Monday, it hit its highest since August 2014 at 1.189.p

　　pU.S. Treasuries also applied further downward pressure on euro zone borrowing costs, with the U.S. 10year yield falling 6 bps to 2.97.p

　　p“We think the euro zone government bond market selloffwill pause in the next few days as it has to digest a sharp selloff in risky assets involving equities and credit,” said Philippe Gräub, head of global fixed income at UBP. p

　　pRiskaversion usually boosts demand for safehaven government bonds, driving yields down.p

　　pMoney markets are currently pricing 86 bps of ECB rate hikes by yearend, from around 95 bps on Monday.p

　　pThe spread between Italian and German 10year bond yields tightened 9 bps to 197.1 after hitting its widest since May, 2020 on Monday at 206.90 bps.p

　　pIt was at 209 bps on May 18, 2020, right after the news that France and Germany proposed a 500 billion euro 528.20 billion Recovery Fund that would offer grants to European Union regions and sectors hit hardest by the pandemic.p

　　p“It was the perfect storm for the Italian German yield spread, with central bankers worried about inflation, while risky assets fell on concerns about economic growth,” said Rohan Khanna, research strategist at UBS. p

　　pThe yield spread between core and periphery has recently widened as hopes for further monetary and fiscal support for indebted southern European countries have faded.p

　　pItalys 10year government bond yield fell on Tuesday by 15.5 bps to 2.99 after hitting its highest since December 2018 at 3.232 on Monday.p

　　pGerman investor sentiment rose slightly in May on expectations the economic situation in Europes largest economy will deteriorate less markedly than predicted previously as the European Central Bank acts to tame inflation. p

　　p1 0.9466 eurosp

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　　pp Reporting by Stefano Rebaudo, Editing by Kirsten Donovanp

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