Italy’s government bonds rose, with 10-year securities extending a fourth weekly gain, as Prime-Minister-designate Matteo Renzi prepared to name his cabinet amid speculation he will accelerate economic reform.
The extra yield on the securities over benchmark German bunds narrowed toward the least since 2011. Renzi planned to meet Italy’s President Giorgio Napolitano in Rome this afternoon. Spain’s 10-year bonds also gained before a report next week that economists said will confirm that inflation in the euro area slowed in January, strengthening the case for the European Central Bank to reduce interest rates.
“There’s a lot of hope surrounding Renzi,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “The spreads to bunds still offer a considerable yield reach, and with bunds looking fantastically expensive you can see why people are still reaching for the yield.”
Italy’s 10-year yield fell five basis points, or 0.05 percentage point, to 3.60 percent at 4:56 p.m. London time, having slipped to 3.53 percent on Feb. 19, the lowest since January 2006. The 4.5 percent bond due in March 2024 rose 0.43, or 4.30 euros per 1,000-euro ($1,373) face amount, to 107.79.
The yield difference between the securities and similar-maturity German bunds shrank one basis point to 1.95 percentage points after narrowing to 1.86 percentage points on Feb. 19, the least since July 2011.
Renzi has pledged to overhaul Italy’s labor market, modify the tax code and change the country’s election law during his first 100 days in office. The meeting with Napolitano was due to take place at 4 p.m. local time, la Repubblica reported earlier.
Spain’s 10-year yield fell five basis points to 3.55 percent after declining to 3.49 percent on Feb. 19, the least since February 2006. Germany’s 10-year bund yield dropped three basis points to 1.66 percent.
The bonds of the region’s most-indebted nations are extending a rally that started when ECB President Mario Draghi pledged in 2012 to do whatever it takes to safeguard the euro.
Demand for the securities is being buoyed further by speculation that slowing inflation will prompt the central bank to cut the main interest rate from a record-low 0.25 percent, and introduce unconventional measures including government bond purchases.
The euro-area sovereign market will start pricing in quantitative easing “from now on” and the policy shift will probably lead to Italian and Spanish spreads narrowing by another 90 to 100 basis points relative to German counterparts, according to BNP Paribas SA.
“While we do not expect Draghi to go so far as to pre-announce QE at the March press conference, there’s a risk that the new staff CPI forecasts, including for 2016, will be the catalyst for a further signal in that direction,” BNP Paribas global head of Group-of-10 rates strategy Laurence Mutkin wrote in a client note dated yesterday. Policy makers next decide on monetary policy on March 6.
The yield spread between Spanish 10-year bonds and similar-maturity German debt narrowed three basis points to 1.89 percentage points after sliding to 1.75 percentage points on Jan. 9, the least since April 2011.
Consumer prices rose an annual 0.7 percent in January after a 0.8 percent gain in December, the European Union’s statistics office will say on Feb. 24, confirming a Jan. 31 release, according to a Bloomberg News survey of economists. The central bank aims to keep inflation at just under 2 percent.
Volatility on German bonds was the highest in the euro-area markets today, followed by those of Austria and France, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
Italian securities returned 3 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s gained 3.6 percent and German bonds earned 1.8 percent.