Italian-German Bond Yield Spread Narrows to Least Since April

  • Prospect of further easing by ECB drives spread to 6-month low
  • Italy's Treasury sells 7 billion euros of government debt

Investors are demanding the lowest yield premium to hold Italian 10-year government debt over similar-maturity German bunds in six months amid speculation the European Central Bank will expand its stimulus measures.

Yields on peripheral euro-area bonds have dropped closer to those of the region’s benchmark sovereign securities as investors gauged when the ECB will either extend or expand its 1.1 trillion-euro ($1.3 trillion) quantitative-easing program. Italy’s bonds were supported as the nation matched its maximum target of 7 billion euros in auctions of debt due between 2018 and 2032 on Tuesday.

Narrowest Spread in Six Months
Narrowest Spread in Six Months

“There’s a lot of speculation in the market that the ECB might be forced to extend the duration of their QE program potentially in December,” said Martin van Vliet, ING Groep NV’s senior interest-rate strategist in Amsterdam. “That’s keeping a lid on peripheral yields and that’s certainly helping push spreads tighter.”

The yield difference, or spread, between Italian 10-year bonds and equivalent-maturity bunds narrowed to 107 basis points, the least since April 7, based on closing prices. ING’s van Vliet said the spread may fall to less than 100 basis points in the next few months to levels last seen in March, when the ECB embarked on its bond-buying program.

Italy’s 10-year bond yield fell two basis points, or 0.02 percentage point, to 1.66 percent as of the 5 p.m. London close. The 1.5 percent security due in June 2025 rose 0.205, or 2.05 euros per 1,000-euro face amount, to 98.66. The yield on similar-maturity German bunds rose one basis point to 0.59 percent.

The Rome-based Treasury allotted 3.5 billion euros of notes maturing in October 2018 at an average yield of 0.25 percent. Italy also sold securities due in September 2022 and March 2032.

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