UPDATE 1-yield Italian bonds fall, markets get ready for the ECB meeting | Instant News

* Eurozone periphery government bond yields tmsnrt.rs/2ii2Bqr (Recast, add details)

By Yoruk Bahceli

LONDON, June 1 (Reuters) – Italian bond yields fell on Monday as markets prepared for the European Central Bank meeting Thursday, after posting their best monthly performance since January.

Economists expect the ECB to increase bond purchases, possibly by 500 billion euros. Purchasing has been a major factor pressing down on Italian borrowing costs.

“The ECB Board meeting dominated the week and will be the most important for the spread,” Commerzbank analysts told clients, referring to bonds from people like Italy who pay higher than Germany.

Italian 10-year bond yields remained near two-month lows early Monday, down 3 bps to 1.46%. The risk premium they paid for their German equivalent was 185 bps, down 4 bps on that day.

It happened after they recorded their biggest monthly decline in four months in May, driven by the possibility that the country would get a grant from the European Union to support the economy affected by the corona virus.

UniCredit analysts noted that, in addition to the EU recovery fund proposal, which would offer 500 billion euros in grants to benefit the hardest hit economies such as Italy, statements by ECB policymakers that they would implement key capital in a flexible way had fed the rally in Italian bonds.

Banks can apply capital keys – which regulate how to allocate their purchases based on the share ownership of each country in the ECB – flexibly for their emergency purchasing program.

But analysts also caution that, given the recent Italian rally and expectations of the ECB, there is room for disappointment, while lower yields can also encourage investors to take profits.

Safe-haven, German 10-year bond yields rose 2 bps to -0.43%, echoing risk-on movements in the stock market, which focused on opening up the economy, with help from the United States, which kept China’s trade agreements intact.

Reporting by Yoruk Bahceli, edited by Larry King


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