Italy’s Bond Yield Falls to 17-Month Low After BOE Eases Policy

  • German bunds drop with Treasuries after U.S. payrolls data
  • Calling for a debt selloff ‘premature’: Societe Generale

Italy’s government bonds moved full circle and notched a third weekly advance after the Bank of England’s decision to cut interest rates reinforced the global trend toward easier monetary policy that supports fixed-income securities.

Italian 10-year yields fell to the lowest in almost 17 months after rising earlier in the week with counterparts across the globe as a weak Japanese bond auction prompted some investors to question the sustainability of the rally in sovereign debt.

Spain’s 10-year bond yields also climbed earlier this week before the BOE Thursday cut its key interest rate and said it would resume its asset purchases. That added to speculation the European Central Bank will increase its stimulus measures at its next policy meeting in September.

Click here to see Bloomberg’s interview with Steven Major, HSBC’s head of global fixed-income research.

Investors had shown signs of rebelling after a rush to sovereign debt in the wake of Britain’s June 23 decision to leave the European Union pushed yields on about a third of developed-market bond markets below zero. Yields jumped after the Bank of Japan left bond buying and its negative deposit rate unchanged last month, damping demand for government debt.

‘Crying Wolf’

With some traders speculating that central banks are running out of ammunition, demand for fixed-income assets has also been threatened by the prospect of fiscal stimulus from governments that typically boosts supply and depresses prices.

“The bears who have been crying wolf for so long have jumped on the BOJ disappointment and called for a bond selloff,” analysts at Societe Generale SA, including Vincent Chaigneau, London-based global head of rates and foreign-exchange strategy, wrote in a client note Friday. “The BOE has reminded everyone this is both premature and exaggerated.”

Italy’s 10-year bond yield was little changed at 1.14 percent as of 4:34 p.m. London time, having earlier dropped to 1.13 percent, the lowest since March 2015. The price of the 1.6 percent security due in June 2026 was 104.315 percent of face value. 

Spanish 10-year bond yields were little changed at 1.02 percent, almost matching their level at the end of last week and about two basis points from a record low reached on Aug. 1.

Benchmark German bonds fell with their U.S. counterparts as report showed U.S. payrolls growth exceeded forecasts in July, and wages climbed.

The 10-year bund yield rose three basis points to minus 0.066 percent, for a five basis-point increase in the week.

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