Top Stories
Top Stories

UPDATE 3-Italian bonds rally, safe-haven Bunds sell off as uncertainty ebbs

Yoruk Bahceli and Dhara Ranasinghe

* German Bund yield set for biggest 1-day jump since June 2018

* Italian 10-year bond yield falls to record low

* Market QE expectations ease (adds German bond chart, no other changes)

LONDON, Sept 4 (Reuters) - German bond yields jumped to their highest level in over a week on Wednesday as demand for safe haven assets eased after Italy's 5-Star Movement approved a coalition deal with the Democratic Party and lawmakers opposed to a no-deal Brexit gained the upper hand in Britain.

Latest comments from European Central Bank (ECB) policymakers meanwhile dampened expectations for aggressive ECB stimulus next week, fuelling a sell-off in euro zone bonds except those of Italy.

Members of the Italian anti-establishment 5-Star Movement overwhelmingly backed a proposed coalition with the centre-left Democratic Party (DP) on Tuesday, paving the way for a new government to take office.

This means the prospect of a snap election in Italy has receded, easing economic uncertainty.

Brexit uncertainty also eased slightly, after an alliance of opposition lawmakers defeated the government on Tuesday, allowing them to try to pass a law which would force an extension to Britain's exit date and avoid an economically disruptive no-deal Brexit on Oct. 31.

"It looks like the easing of the Brexit concerns to a degree and the recovery in risk sentiment is behind the bond sell-off," said Commerzbank rate strategist Rainer Guntermann.

He said that comments from incoming ECB chief Christine Lagarde were in line with recent remarks and provided an excuse for investors to sell bonds.

The euro zone economy faces near-term challenges, so highly accommodative monetary policy for a prolonged period remains necessary, Lagarde said.

Germany's 10-year Bund yield - the euro zone's key safe haven asset - was set for its biggest one-day jump since June 2018, up 7 bps to -0.64%.

Across the euro zone, 10-year bond yields rose 7-8 bps .

Relaunching the ECB'S bond purchasing programme is open to debate at the current juncture, Bank of France governor Francois Villeroy de Galhau was quoted as saying in an interview with French newspaper l'Agefi released on Tuesday.

The comments helped explain the rise in euro zone bond yields, analysts said.

"This raises the risk that there is disappointment at the upcoming meeting, relative to what markets are expecting," said Benjamin Schroeder, senior rates strategist at ING.

ECB policymakers are leaning towards a stimulus package that includes a rate cut, a beefed-up pledge to keep rates low for longer plus compensation for banks over the side-effects of negative rates, though restarting asset purchases remains uncertain, according to a Reuters source-based story on Tuesday.


As risk sentiment strengthened, Italy's 10-year bond yield hit a fresh record low of 0.80% and the closely-watched 10-year bond yield gap over safer German Bund yields tightened to around 145 bps -- its narrowest in more than a year.

Italy's bond market has rallied strongly since 5-Star and the PD reached a coalition deal last week. Still, the online ballot results remove a final hurdle to the formation of a new government.

"For the time being the vote legitimises the rally that we have been seeing in the Italian bond market," said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Elsewhere, Greece's 10-year bond yield fell 4 bps to 1.57% after economic growth gained pace in the second quarter.

(Reporting by Dhara Ranasinghe and Yoruk Bahceli; Editing by Gareth Jones)