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Italian bonds set for best week in two months

By Dhara Ranasinghe

LONDON, July 24 – Italy’s bond market was poised for its best week in two months on Friday, with borrowing costs holding near 4-1/2 month lows in the aftermath of an EU recovery fund deal that will provide support to economies such as Italy hit hard by the coronavirus.

Even U.S.-China tensions which weighed on investor sentiment and world stock markets failed to put a significant dent in southern European bond markets, which tend to move in line with world risk assets.

Italy’s 10-year bond yield was steady at around 1.05% , holding near Thursday’s 4-1/2 month low at 1.04%. According to Tradeweb data, 10-year Italian bond yields dipped below 1% on Thursday for the first time since March.

Italian bond yields have tumbled 18 basis points this week and are set for their biggest weekly fall in two months. Spanish, Portuguese and Greek 10-year debt yields have tumbled around 10 bps each .

Germany’s Bund yield was a touch lower on Friday at -0.49% .

EU leaders on Tuesday agreed to a 750 billion euro recovery, which Italy’s Prime Minister Giuseppe Conte said would allow his government to transform Italy. Italy and Spain, two of the countries hardest hit by the pandemic, are also among the biggest beneficiaries of the deal.

In addition, aggressive stimulus from the European Central Bank and signs that the euro zone economy is recovering from the coronavirus hit has boosted investor sentiment towards the region’s assets. The euro is trading near 21-month highs.

This backdrop is encouraging so-called carry trades, where investors borrow at low interest rates and invest in higher-yielding assets such as Italian debt.

The “flash” Purchasing Managers’ Index data of economic activity in July released on Friday could provide another boost to sentiment, analysts said.

“Today’s PMIs should provide further conviction to capture carry,” said Michael Leister, rates strategist at Commerzbank. (Reporting by Dhara Ranasinghe; Editing by Catherine Evans)

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