May 17, 2018 / 8:05 AM / 4 months ago

Italian bonds ease after selloff though concerns remain

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Saikat Chatterjee

LONDON, May 17 (Reuters) - Italian yields eased on Thursday a day after notching up their biggest one-day rise in more than a year after reports, subsequently denied, that a potential government had drafted an plan to seek debt forgiveness from the European Central Bank.

The anti-establishment 5-Star Movement and the far-right League party planned to ask the European Central Bank to forgive the 250 billion euros in debt, according to media reports though the League’s economic spokesman told Reuters that debt cancellation was never in an official draft.

While few investors see that as either a realistic proposal or one that would remain in the coalition’s agenda, the tone of the stance toward euro zone rules was seen as confrontational and spooked some investors.

“BTPs should remain under pressure in the near term burdened by the political situation with the overall market sentiment remaining cautious as investors are moderately long” said Orlando Green, interest rate strategist at Credit Agricole CIB in London referring to Italian government debt.

On Thursday, yields on benchmark ten-year Italian debt edged lower to 2.10 after hitting a two-month high of 2.13 percent in the previous session. Yields on two-year maturities fell back to 0.05 percent compared to Wednesday’s close of 0.12 percent.

Wednesday’s spike of 16 basis points in Italian debt was its highest since March 2017, sending shockwaves through other peripheral debt at a time when concerns of a pull back in policy accomodation by the world’s major central banks and rich valuations have weighed on investors’ minds.

Thursday will offer a litmus test to whether appetite for peripheral European debt remains intact with Spain hitting the bond market on Thursday to launch a five-year benchmark bond though some investors remain bullish on the country’s outlook.

David Zahn, head of European fixed income at Franklin Templeton said this week that he remains positive on the outlook for Spanish debt because of improving fundamentals.

On a year-to-date basis, Spain and Greece are the best performing bond markets this year in Europe with returns of more than 2 percent each, according to Thomson Reuters data.

But with U.S. and core German yields pushing higher in recent days, the headroom for yields in peripheral markets to narrow substantially from present levels is shrinking rapidly.

In early trading on Thursday, benchmark 10-year U.S. Treasury yields rose to a near seven-year high of 3.12 percent while yields on two-year maturities climbed to its highest since August 2008 at 2.59 percent. (Reporting by Saikat Chatterjee Editing by Matthew Mpoke Bigg)

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