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Italian debt in demand as political storms abate

Italian 10-year government bond yields are 4 bps lower on Tuesday at 2.81 per cent, pushing the spread over Germany down to 232 bps

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Financial consultants outside the Stock Exchange in Milan. Italy's new Finance Minister Giovanni Tria has made assurances that the country will stay committed to the euro.

London

THE spread between Italian and German 10-year borrowing costs narrowed on Tuesday as positive news from a summit between North Korea and the United States followed reassuring comments from Italy's new economy minister.

The closely-watched yield spread narrowed to its tightest in a week in early deals, though moves in the eurozone bond market were small relative to the volatile trade of recent days.

US President Donald Trump and North Korean leader Kim Jong Un signed a "comprehensive" document on Tuesday following a historic summit in Singapore, promising to work towards complete denuclearisation of the Korean peninsula.

This added to Monday's relief rally in Italian assets after the Corriere della Sera newspaper on Sunday reported Economy Minister Giovanni Tria as saying that the coalition was committed to remaining in the eurozone.

"There is some positive sentiment from the North Korea news even though a lot of the progress has been priced in already," said ING strategist Benjamin Schroeder. "Also I think the move today is a continued reaction to the headlines from . . . Italy."

Italian 10-year government bond yields were four basis points (bps) lower on Tuesday at 2.81 per cent, pushing the spread over Germany down to 232 bps.

Earlier in the session that spread - seen by many investors as a measure of sentiment towards the eurozone as a whole - went as tight as 227 bps, its lowest in a week and compared to a gap of 268 bps at the end of last week.

Top-rated eurozone government bond yields were 1-2 bps higher across the board, with Germany's 10-year yield, the benchmark for the region, up 1.5 bps at 0.51 per cent.

Analysts said that the outcomes of upcoming key central bank meetings could move the market as the week progresses.

It has been a turbulent time for markets in the last few weeks. Italy's yield curve has undulated violently as the new government's views on the euro and spending have dominated investor concerns.

The difference in yields between the nation's 30- and five-year bonds will shrink to levels last seen in 2011 as political risks may re-emerge, according to Mizuho International.

"In this game of chicken, the Italian government is trying to implement enormous change and establish leverage to increase the deficit, and Europe is going to be pushing back," said Peter Chatwell, head of rates strategy at Mizuho.

The yield difference between 30- and five-year bonds could narrow to 50 basis points or below, from around 150 basis points currently, should the new government's spending plans strain its finances, Mr Chatwell added.

The yield curve has flattened in the past month as investors demand a higher premium to hold shorter-dated debt on the risk of Italy leaving the common currency.

NatWest Markets believes that investors had priced in a too-high chance of Italy leaving the monetary union, with the two-year yield equivalent to that on a 30-year French bond last week.

The US Federal Reserve is widely seen to be hiking rates on Wednesday at the end of a two-day policy meeting while the European Central Bank is expected to provide details on the unwinding of its 2.55 trillion euro (S$4 trillion) bond buying programme on Thursday.

US May consumer price inflation was due on Tuesday, with a Reuters poll showing expectations of 2.7 per cent year-on-year.

Germany's ZEW Institute was due to publish its Economic Sentiment survey for June. DZ Bank analysts said that it could disappoint because it was conducted while the Italian government bond market was being roiled by political concerns. REUTERS, BLOOMBERG

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