Italian 10-year bond yields slip below 2%

Posted on November 29, 2016

Italian government debt is rallying strongly today with 10-year yields falling below 2 per cent for the first time in a week, helped along by reports the European Central Bank could ramp up its purchases of the country’s bonds ahead of a crucial referendum on Sunday.

Yields on Italy’s benchmark 10-year bonds are down 0.07 percentage points (7 basis points) on Tuesday to 1.98 per cent – outperforming peers across the eurozone today (yields fall when a bond’s price rises).

Within the last hour, Reuters has reported that ECB policymakers are ready to temporarily accelerate their purchases of Italian government debt as part of its existing quantitative easing measures, in a bid to calm market nerves should a ‘No’ vote lead to heightened volatility after the referendum.

Italian yields have climbed above 2 per cent for the first time since 2015 this month as investors have sold the country’s debt on the back of rising concern over support for populist groups who are critical of Rome’s eurozone membership.

Addressing MEPs on Monday, ECB president Mario Draghi rejected any suggestions the central bank would intervene in a bailout of the country’s struggling banking system. He added, however, that the Italian economy remained “vulnerable to shocks”.

The ECB has been snapping up €80bn of government bonds a month as part of its landmark asset purchase programme, launched in March last year. The purchases are carried out by the eurozone’s national central banks and are done according to the share of GDP represented by each member state.

Policymakers have flexibility within the QE framework to quicken or slow the pace of its purchases of different government debt. In the past, it has used this flexibility to buy fewer bonds in periods during the summer, when debt markets are less active.

Last week, ECB vice president Vitor Constancio hinted policymakers would react to any adverse financial shock from the vote on constitutional reform that prime minister Matteo Renzi has staked his job on.

“It’s the sort of political uncertainty that will trigger or not an economic shock in financial markets”, said Mr Constancio.

“And depending on the degree of that shock, then we have to see if we have anything to do or not”.

An ECB spokesperson declined to comment.

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