UPDATE 1-Dovish ECB keeps Italy's bond yields near lowest in almost 8 weeks

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with EU bond issue, chart, quote)

LONDON, June 14 (Reuters) – Italy’s 10-year sovereign borrowing costs were pinned near their lowest levels in almost eight weeks on Monday, as comments from the ECB president supported the view that there is no hurry to taper aggressive emergency stimulus.

European Central Bank chief Christine Lagarde told Politico that while the euro zone economy is at a turning point, its recovery must be firm and sustainable before the central bank can debate clawing back emergency support.

The ECB agreed last week to maintain an elevated pace of bond purchases to keep borrowing costs ultra-low, and policymakers did not entertain questions about tapering support, even as the economy rebounds from the COVID-19 shock.

This backdrop has supported euro zone bond markets in recent days, allowing yields to fall further.

Italy, one of the biggest beneficiaries of ECB bond-buying, has led the way. Its 10-year bond yield touched 0.74% , its lowest level in almost eight weeks, before steadying around 0.75%.

“Lagarde’s comments (this and last week) support stability in rates,” said ING senior rates strategist Antoine Bouvet.

“This should in theory attract more demand into carry trades (in particular high-yielding bonds) but I think this is largely priced in,” he said, adding that bond markets could become more vulnerable to a pullback around bond issuance.

Most 10-year bond yields in the euro area were steady with Tuesday’s two-day meeting of the U.S. Federal Reserve providing another reason for subdued trading across markets.

Germany’s benchmark 10-year bond yield was flat on the day at -0.27%. It hit -0.287% on Friday – its lowest since April.

Market focus meanwhile turned to the European Union, which hired banks for a new 10-year bond sale – the first issuance to finance the 800 billion euro recovery fund.

The sale is expected to be launched on Tuesday and raise around 10 billion euros.

The EU is set to become one of the world’s biggest issuers with 80 billion euros worth of bonds for the recovery fund sold this year. “The key point is that new EU bonds will provide investors with a liquid alternative,” said Lidia Treiber, director, research at WisdomTree Asset Management. “This moment sets a precedent as an additional tool that the EU and the ECB has.” ($1 = 0.8261 euros)

Source: Read Full Article