February 7, 2019 / 8:41 AM / a year ago

Italian long-dated govt bond yields elevated as market digests new issue

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

By Virginia Furness

LONDON, Feb 7 (Reuters) - Long-dated Italian government bond yields held close to three-week highs as investors continued to digest the country’s 30-year syndicated issue, ahead of an expected move by the European Commission to slash its interim forecast for Italian growth.

The bond sale, which attracted record orders of 41 billion euros, is a vote of confidence in Italy’s outlook and represented a notable turnaround from the sell-off that hit the country’s debt last year when a eurosceptic, anti-austerity government took office.

However, the European Commission will slash its 2019 growth forecast for Italy to 0.2 percent from its previous estimate of 1.2 percent given in November, a source at the European Commission said on Wednesday, confirming an earlier report by Ansa news agency.

Italy’s economy contracted for the second consecutive quarter at the end of last year, throwing the country into its third recession in a decade.

Italy agreed a deficit target of 2.04 percent in December, averting a major fall-out with the EU, though this was based on a growth assumption of 1.0 percent. Slowing growth in Italy could make it harder for the country to remain within EU rules.

However, Benjamin Schroeder, rates strategist at ING, said he did not expect the EU to demand more fiscal tightening from Italy, should its forecasts be reduced.

“The EU has another thing to deal with — Brexit — and the other thing is do you want to infuse the campaign ahead of the parliamentary elections with this topic.”

Italian 30-year government bond yields were on track for their biggest weekly rise since September on Thursday, having touched three-week highs on Wednesday following the bond sale. Italy’s 30-year yield was last seen at 3.75 percent.

“BTPs are the clear underperformer this morning which is indigestion from yesterday’s 30-year (sale), which doesn’t really come as a surprise,” said Peter Chatwell, rates strategist at Mizuho.

Analysts say that while demand for euro zone government bonds remains strong — good news for Spain and Italy which are due to auction debt later today — a higher concession is required.

“In that vein we will be watching today’s auctions in Spain and France for any signs of exhaustion,” said ING’s Schroeder.

More disappointing data from the euro zone’s largest economy raised concerns about slowing growth in Europe on Thursday, but helped play into the European Central Bank’s ‘lower-for-longer’ stance on rates, a positive for holders of government bonds in the bloc.

German industrial production fell in December in a further sign that the euro-zone’s largest economy is struggling. The 0.4 percent monthly fall was below the forecast increase of 0.7 percent and follows a 1.6 percent monthly drop in industrial orders as published on Wednesday.

Germany’s 10-year government bond yield slid one basis point in early trade to 0.15 percent, not far off its lowest since November 2016.

Other core euro zone bond yields were flat to marginally lower,. (Reporting by Virginia Furness; Editing by Toby Chopra)

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