* Eurozone periphery government bond yields tmsnrt.rs/2ii2Bqr (Updates throughout)
By Elizabeth Howcroft
LONDON, July 31 (Reuters) – Eurozone government bonds were sold on Friday, both in the core and periphery, with Italian 10-year bonds set as the worst day since early May but still producing strong performance throughout the month.
With the market widely cautious on Friday, analysts said the sell-off could be triggered by an unusual month-end flow.
“I attribute it to long-term, long-term positions from dealers who may be mistaken because of the sale of real cash flow,” said Peter Chatwell, chief of multi-asset strategy at Mizuho.
Analysts were surprised by the move, because the month-end index extension – where funds rebalanced their portfolios to reflect activity during the month – was expected to support bonds at the start of the session.
Italian 10-year yields are at their highest level in more than a week, up 6 basis points (bps) at 1.092% at 1449 GMT.
However, Italian bonds have experienced a decent month, with yields set down 24 bps in July – the best month since May. The paper demand was driven by recovery funds agreed by the European Union last week.
The 750 billion euro fund, which will partly be offered as a grant to the member states hardest hit by the coronavirus, has been hailed as a game changer for the eurozone and has increased Italy’s debt, given concerns about the country’s sustainability. loan.
Italy’s risk premium pays Germany for 10-year debt falling to March lows when the fund was agreed, although it has risen again this week, and is 3 bps wider on Friday at 160.65 bps.
Mizuho Chatwell said the Italian rally that was easing this week could be due to oversupply.
“What happened to BTP was a bit exhausted after recording a number of supplies,” he said.
“I think the market is now saturated with this positivity, but supply continues to run,” he added.
The 10-year German Bund benchmark was set for the best month since April, as investors flocked to safe-haven debt, pushing yields below -0.5%.
Safe-haven bonds are likely to remain supported given the increasing number of coronavirus cases around the world, raising fears of new lockouts.
Global fund managers prefer to cut equities to their lowest level in four years in July while keeping bond allocations unchanged, as hopes for economic recovery fade, a Reuters poll shows.
Data on Thursday revealed a record contraction in Germany – the region’s leading economy – and sent Bund results to two and a half month lows, but there was little reaction on Friday to the euro zone GDP estimates.
But euro zone inflation suddenly rose in July, supporting the European Central Bank’s expectations that negative headline readings could be avoided. (Reporting by Yoruk Bahceli and Elizabeth Howcroft; editing by Gareth Jones and Mark Potter)