UPDATE 1-Italy bond spread tightens to pre-COVID 19 crisis level

* Italian yields drop 1.5 bps to 1.04%

* Gap over Germany close to five-month lows

* Chinese central bank pumps in money, boosting stocks

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds graphic, updates prices)

By Abhinav Ramnarayan

LONDON, Aug 17 (Reuters) – Italian government bonds dipped and the spread over Germany reached its tightest level since February as more money flowed into the global economy, this time courtesy of the Chinese central bank, boosting stocks and other riskier assets globally.

Chinese shares jumped on Monday, led by securities firms, on hopes that capital market reforms would boost revenues and after the central bank injected new funds into the country’s financial system.

This added to the unprecedented amount of liquidity pumped into the global monetary system by the U.S. Federal Reserve and the European Central Bank, which has pushed Wall Street to within a sliver of a record high.

In quiet trading, Italian 10-year bond yields dipped two basis points to 1.03%, compressing the closely watched Italy-Germany bond yield spread to 144.4 basis points, the tightest level since February.

“Global risk sentiment is still quite supportive, though to a degree the moves are down to the time of the year and lopsided positioning on the part of investors,” said Commerzbank rates strategist Rainer Guntermann.

He said peripheral spreads are being pushed tighter in anticipation of European Union unemployment support, which begins in September, and the broader EU recovery fund, which kicks in over the next three to four years.

Meanwhile, benchmark German 10-year bond yields dipped slightly to -0.42%, having climbed eight basis points in the previous week.

The sell-off in high-grade government bonds comes in the face of spiking COVID-19 cases and bleak economic news around the world.

Data showed on Monday that Japan was hit by its biggest economic slump on record in the second quarter as the coronavirus pandemic emptied shopping malls and crushed demand for cars and other exports.

New Zealand Prime Minister Jacinda Adern postponed the country’s general election on Monday by a month to Oct. 17 as the city of Auckland remains in lockdown due to increasing coronavirus cases.

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