June 5, 2018 / 12:26 PM / 14 days ago

UPDATE 1-Pool of sub-zero euro debt yields shrinks further in May after Italy selloff

By Dhara Ranasinghe

LONDON, June 5 (Reuters) - The pool of government bonds in the euro area with sub-zero yields shrank in May, according to latest data from trading platform Tradeweb, as a sharp selloff in Italy’s bond market drove up borrowing costs in southern Europe.

The share of euro zone government debt with negative yields fell to 35.5 percent at the end of May from 40 percent at the end of April, Tradeweb data released on Tuesday showed.

That marked the lowest share of negative-yielding bonds in the bloc since Tradeweb started collating monthly data in mid-2016.

Analysts said the move was likely driven by Italy’s political crisis, which sparked a surge in Italian borrowing costs and pushed two-year bond yields above zero percent for the first time in over a year.

“The Italian market has clearly been the big mover of the past month,” said Nordea chief analyst Jan von Gerich.

“The trend is that this pool is contracting and we are very gradually leaving the most extreme environment of negative yields behind.”

Of around the 7.3 trillion euros of the bonds in the system, about 2.61 trillion euros yield less than zero, according to Tradeweb, one of the world’s largest bond platforms and majority-owned by Thomson Reuters Corp.

The pool of negative-yielding bonds has been on a downward path since hitting a peak around 60 percent in August 2016, shortly after Britain’s vote in favour of leaving the European Union, which roiled markets and raised fears about the global growth outlook.

Negative yields mean investors are effectively prepared to pay to lend to governments and corporates. In government bond markets, that fall in yields below zero percent has been driven largely by central bank stimulus.

Tradeweb’s data shows around 22 percent of euro zone government bonds yielded less than the ECB’s deposit rate of minus 0.4 percent at the end of May, around the same as at the end of April.

While short-dated Italian bond yields rose sharply last month, rising some 134 basis points, demand for safe-haven German bonds pushed short-dated yields in the euro zone’s biggest economy down 11 bps.

Italy’s two-year bond yield was trading at 0.90 percent on Tuesday, while German 2-year yields were at minus 0.65 percent.

Almost 19 percent of the euro-denominated investment-grade corporate bonds available on the Tradeweb platform yielded less than zero at the end of May, the lowest in almost a year.

Reporting by Dhara Ranasinghe, Editing by Abhinav Ramnarayan and John Stonestreet

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