Italian yields tumble at end of busy week for euro zone supply

LONDON: Italian government bond yields fell sharply on Friday following the successful sale of 6.5 billion euros of its debt, wrapping up the busiest week for euro zone bond issuance in three years.

Euro zone governments have issued over 35 billion euros of bonds via auction and syndications this week, which is the highest weekly volume in three years, according to Commerzbank.

Italy's successful sale helps to alleviate concerns that the sovereign may face difficulties raising the 250 billion euros for its 2019 funding programme without the European Central Bank backstop.

It also comes amid a bumper week for bonds which saw high levels of over-subscription at those bonds sold via a syndicate of banks, as well as attractive funding cost for governments.

"We had an extremely volatile and difficult end to 2018, and so many investors had cash on their hands and were looking for a relatively safe place to put their cash," said a syndicate banker who worked on some of the week's bond sales.

"There's been very few opportunities to buy relatively safe assets so investors jumped at these syndications," he added, referring to bond sales by the likes of Belgium, Ireland and Portugal.

Issuers were keen to fund ahead of next week's vote in the UK parliament on Britain's deal to leave the European Union, and to take advantage of the calmer markets following soothing comments by U.S. Federal Reserve Chairman Jerome Powell this week and last, according to a London based syndicate banker.

As a result, Belgium, Ireland and Portugal all completed syndications this week receiving record combined demand of 70 billion euros. Germany also held an auction this week.

Italian government bond yields fell up to eight basis points following the sale of new three, seven and 30 year bonds.

Italy's five year government bond yield fell to 1.81 percent , its lowest level in a week, while its 10-year bond yield fell nearly six bps to 2.83 percent.

GREAT FOR RATES

Elsewhere, euro zone bond yields fell after Fed chief Powell on Thursday stressed that the U.S. central bank can be patient in approving any further rate increases, as officials gauge whether the U.S. economy will slow this year.

That overshadowed the pick-up in risk sentiment that was driving equity markets up.

"If they (the Fed) do pause, it rationalises the fact that hikes have been priced out and keeps rates lower," said Martin van Vliet, ING senior rates strategist.

German government bond yields, the benchmark for the region, fell around one basis point across the curve. Ten-year bond yields dipped to 0.189 percent, close to over two-year lows hit last week.

Other core euro zone bond yields were also 1-2 basis points lower .

Elsewhere, Fitch will publish its review of Spain's credit rating after market close, though analysts do not expect any change to its A- rating, and DBRS will publish its rating review on Italy.

Spain's cabinet is due to approve its draft budget for 2019. The deficit target is expected to be slashed to 1.3 percent, instead of 1.8 percent.