* Difference in Italian / German Roundabout results below 200 bps
* Italian 10-year yields fell to their lowest level in nearly 7 weeks
* German Bund results at one month highs (Updates throughout, adds details, graphs, comments)
By Dhara Ranasinghe
LONDON, May 26 (Reuters) – Italian 10-year bond yields fell to a seven-week low on Tuesday, following a rally in risky assets and when comments from European Central Bank officials boosted hopes of further stimulus soon.
Italy’s borrowing costs fell for seven days in a row, falling sharply after the Franco-German proposal a week ago for a € 500 billion recovery fund that would offer grants to areas hardest hit by the coronavirus pandemic.
The latest price hike, pushing 10-year yields to as low as 1.53%, comes when world stocks strengthen because of hopes for a fast global economic recovery and comments from ECB policymaker Francois Villeroy de Galhau pushes new stimulus hopes at the ECB meeting next week.
As Italian 10-year bond yields fell to their lowest level in seven weeks, the gap over the highest German Bund yields fell below 200 basis points for the first time since mid-April.
“The positivity of the Franco-German fund continues to see the periphery supported, and that positivity will continue unless there is a massive decline by either France or Germany,” said Henry Occleston, tariff strategist at Mizuho.
He noted that the slow progress in setting up recovery funds meant the issuance of hefty bonds from Spain and Italy.
“That means it is very important for the ECB to expand its purchases there to prevent future debt crises. “That’s where Villeroy’s comments were put into, as providing further support for the expansion of peripheral assets,” Occleston said.
Speaking on Monday night, Villeroy said some eurozone central banks must be prepared to buy more bonds and others to ensure the smooth transmission of monetary policy.
Nick Kounis, head of financial market research at ABN AMRO, said Villeroy’s comments suggested the ECB was willing to deviate sharper than the key capital under the emergency bond purchase program.
Although the ECB buys government bonds in accordance with the ownership of each country’s shares in banks, which are called capital keys, the ECB says it will be flexible and may deviate from this rule by purchasing emergency bonds.
Italy has been the main beneficiary of loading ahead of ECB asset purchases in recent weeks.
“The Governor of Banque de France is an influential member of the Governing Council so language changes need to be taken seriously. We doubt he flies alone in this regard, “said the Communists.
As world stocks reap strong gains and the bond market prepares for a new wave of eurozone bond supply this week, yields on higher-rated bonds shot higher.
Yields on German 10 and 30-year bonds rose to one-month highs with 10-year Bund yields rising by almost 6 bps to -0.42%.
Reporting by Dhara Ranasinghe, edited by Kirsten Donovan