Italy : Yields edge up before sale of new 10-year bond

LONDON : Italian government bond yields edged up on Thursday as investors prepared for an auction of a new 10-year bond a day before European Union stress tests that are expected to highlight problems at some of Italy’s banks.

Italian benchmark bonds have underperformed their Spanish peripheral peers since Britain’s June 23 vote to leave the European Union. The extra yield investors demand to hold Italy’s 10-year debt over Spain’s hit its highest since February 2015 earlier this week, at 13.8 basis points.

Rome will auction up to 6.5 billion euros of five- and 10-year government bonds, along with up to 2 billion euros of floating-rate CCTeu certificates.

“It’s probably not a coincidence that it’s on the day before the stress test results,” ING senior rates strategist Martin van Vliet said.

The results of the annual health check on European Union banks is expected to show Italy’s Monte dei Paschi among those faring worst.

Problem loans amounting to 360 billion euros at Italian banks as a whole after a three-year recession are the focus of investor concerns and have weighed on their shares and on government debt.

Italian 10-year yields edged up 0.4 basis points to 1.22 percent while German 10-year Bund yields , the benchmark for euro zone borrowing costs, dipped 0.2 bps to minus 0.14 percent, close to a two-week low.

Spanish equivalents rose 1 basis point to 1.12 percent, taking the Italian/Spanish spread to 10 bps.

Along with the banks’ troubles, Italy faces political uncertainty in the run-up to a referendum later this year on constitutional reform. Prime Minister Matteo Renzi has said he will quit if he loses.

However, van Vliet at ING said he did not think Thursday’s auction would fare badly, thanks to the European Central Bank’s bond-buying quantitative easing scheme, which stands as a backstop fore investors.

“We still clearly see the safety net of the ECB’s QE programme is really helping us. That’s why I don’t expect this auction to fail miserably,” he said.

Commerzbank strategists said in a note that Italy’s yield premium over Germany and Spain and Italian redemption and coupon payments due to investors next week, which it said totalled 23 billion euros, should also help the auction.

Beyond the auction, euro zone debt markets are looking to Friday’s conclusion of the Bank of Japan’s policy meeting, at which it may deliver more stimulus to the flagging economy.

German 10-year yields held close to Wednesday’s closing levels, showing little impact from the U.S. Federal Reserve’s widely expected decision to keep interest rates on hold.

Strategists said the bond market had primarily been influenced by the cautious elements of the Fed statement, in which it held open the possibility of a rate hike later this year but gave no firm indications on timing.