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Italian yields hit five-month lows; spreads tighten

LONDON, Aug 5 – Italian government bond yields hit five-month lows on Wednesday, after U.S. Treasury yields fell to new lows, indicating uncertainty about an economic recovery from coronavirus.

U.S. Treasury yields sank overnight as doubts grew about an economic recovery in the United States. Lack of progress in Washington on the latest coronavirus relief package kept sentiment subdued.

The five-year Treasury yield dropped to a record low on Tuesday, after successive record lows on Wednesday, Thursday and Friday of last week.

Euro zone government bond markets reflected the pessimism, with the German 10-year yield holding close to its lowest in more than two months at -0.55%.

“Bunds seem to be defying gravity as real yields continue to drive the rally,” Commerzbank analysts wrote in a note to clients. “With 10y yields running into hard resistances amid encouraging spread sentiment we opt for tactical shorts.”

European assets have become more appealing to investors as a 750 billion-euro ($882.68 billion) European Union recovery fund boosted sentiment towards the bloc and U.S. coronavirus cases surged.

Italy’s 10-year government bond yield, which fell throughout May and June, fell further on Wednesday, reaching five-month lows at 1.003%, down 2 basis points on the day. The spread between German and Italian 10-year yields narrowed by 5 bps.

Spanish and Portuguese government bond yields also slipped down, but to a lesser extent .

Final euro zone PMI data is due at 0800 GMT and euro zone retail sales are due at 0900 GMT.

The European Central Bank’s chief economist, Philip Lane, downplayed a recent rebound in economic data on Tuesday and said that a full economic recovery would take a long time.

He also said that the bank is committed to supporting the euro zone economy, by using bond purchases as its main tool.

Investors will also be waiting for updates on negotiations on fiscal stimulus in the United States. Treasury Secretary Steven Mnuchin raised the possibility of a deal by week’s end but warned that “we’re not going anywhere close” to the $3.4 trillion package that Democrats have been seeking.

Two more sessions of talks are expected on Wednesday.

U.S.-China tensions continue to drive safe havens, with a White House spokeswoman saying that the United States planned to take some action on Chinese-owned apps in coming days.

Senior U.S. and Chinese officials will meet in a teleconference on August 15 to review the implementation of their Phase 1 trade deal.

Germany is expected to auction 5 billion euros ($5.91 billion) of its 5-year bond, which Commerzbank analysts expect to be “smoothly absorbed.”

($1 = 0.8463 euros) (Reporting by Elizabeth Howcroft, editing by Larry King)

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