As Italy prepares to auction government bonds next week, demand for the nation’s securities is being boosted by investors stocking up on higher-yielding assets over the summer months.
Italy’s 10-year bonds rose for a third week, their longest run of gains since March, amid light supply across the euro region and competing demand from the European Central Bank’s debt-purchase plan.
“Investors have to reach to take on slightly more risk in order to hit their target returns,” Myles Bradshaw, head of global aggregate fixed income at Amundi, said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “I’m not expecting the kind of spread compression we’ve seen in recent years. But, to me, it’s very good value in terms of building a portfolio.”
The yield on Italian 10-year bonds declined five basis points, or 0.05 percentage point, in the past week to 1.87 percent as of the 5 p.m. close in London on Friday. Yields dropped 33 basis points over the previous two weeks. The 1.5 percent bond due in June 2025 rose 0.46, or 4.6 euros per 1,000-euro ($1,097) face amount, to 96.775.
Bonds across the euro zone have rallied this month as Greece secured a fresh bailout and sales of sovereign debt began to tail off for the holiday period, when liquidity tends to be lower. Average yields dropped to 85 basis points as of July 23, down from a year-to-date high of 108 basis points on June 15.
While Italy will sell inflation-linked bonds and other debt in the coming week, it has canceled a zero-coupon note auction scheduled for July 27. The Netherlands is also due to offer debt securities.
Germany’s 10-year bond yield fell 10 basis points in the past week to 0.69 percent. That pushed the extra yield investors demand to hold Italy’s bonds over Europe’s benchmark sovereign securities up by five basis points to 118.
Amundi’s Bradshaw sees that spread narrowing toward 88 basis points. The company manages more than $1 trillion.
Investors will also be looking out in the coming week for signs of inflation, which erodes the purchasing power of the fixed payments provided by bonds.
Consumer prices across the euro region rose 0.2 percent this month from a year ago, economists surveyed by Bloomberg predicted before a report due July 31. At the same time, price growth may be damped by the decline in oil, with Brent crude dropping below $55 a barrel on Friday for the first time in almost four months.
Investors are “very much” focused on “the soft commodity prices,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in London. “We continue to be constructive on non-core” bonds, he said, referring to the debt of nations such as Italy and Spain.