Italy's bond yields tumble on budget hopes, Bund yields at new highs
Italian borrowing costs fell on Tuesday, narrowing the gap with its German peers, on signs that Italy's anti-establishment coalition is likely to reach a compromise over the 2019 budget.
In contrast, Germany's benchmark 10-year bond yield rose to four-month highs, as a bearish tone in broader bond markets lingered a day after European Central Bank chief Mario Draghi pointed to a "vigorous" pick-up in underlying inflation.
Italy's ruling coalition, made up of the anti-establishment 5-Star Movement and the League party, is willing to keep the budget deficit below 2pc of gross domestic product, a government source told Reuters after a meeting at the prime minister's office over the budget late on Monday.
Italy's La Stampa reported that the government will offer a 2019 deficit plan of 1.9pc of GDP this week, including a €36bn investment package. The government must present its budget targets this week.
"Hopes of a compromise is what has had BTPs rallying since the start of trade," said KBC rates strategist Mathias van der Jeugt. "The only dissenting voice now appears to be 5-Star."
Italian bond yields were down as much as 11 basis points in early trade .
Italy's 10-year bond yield fell 9 bps to 2.86pc , shrinking the spread over benchmark German Bund yields to around 232 bps, from around 245 bps late on Monday.
Outside Italy, most euro zone bond yields were 1 to 3 bps higher. French 10-year bond yields hit their highest in over three months.
In Germany, the euro zone's biggest economy and the euro zone's benchmark government bond issuer, 10-year bond yields rose to a four-month high at 0.54pc, a day after posting their biggest one-day jump since June.
"Draghi's comments were the trigger for the bond sell-off and the market is very sensitive on the back of that," Commerzbank rates strategist Michael Leister said.
He also noted investors were ratcheting up expectations for when the ECB will raise interest rates. Money market pricing suggests investors now expect a rate rise next September instead of next October .