Eurozone yields rise on inflation worries, Italy outperforms

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Eurozone yields rose on Monday amid inflation concerns, while Italian government bond prices outperformed peers after parliament re-elected Sergio Mattarella as head of state, leaving Italy former ECB chief Mario Draghi as Prime Minister.

Many analysts see a reduction in Italy’s risk premium with Draghi in charge of the government, as they expect him to pursue structural reforms in government administration, the judiciary and the tax system, which will help Italy to absorb EU funds more effectively.

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Mattarella was re-elected for a second term on Saturday.

“Thanks to today’s strength, we have started to slightly underweight construction” as there is “a lack of consensus within the ruling coalition,” said Gareth Hill, portfolio manager at Royal London Asset Management.

Italy’s 10-year government bond yield rose 2 basis points to 1.37%, after hitting its lowest level since Jan. 14 at 1.294% earlier in the session.

The spread between Italian and German 10-year rates narrowed by 4.5 bps to 134 bps.

“We expect the 10-year BTP-Bund spread to tighten towards the 120bp area, last seen in November,” Unicredit said.

The Italian Treasury could issue a new long-term syndicated bond this week to take advantage of the positive momentum after Mattarella’s re-election.

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But investors also focused on inflation data and potential signals from the European Central Bank on the timing of its future monetary tightening.

Money markets are currently pricing more than the full probability of a rate hike of 10 basis points in September and 25 basis points by December.

“The focus is on the ECB this week as it still needs to clarify its stance on inflation,” said Althea Spinozzi, fixed income strategist at Saxo Bank.

Germany’s annual inflation in January was slightly above analysts’ expectations and well above the European Central Bank’s price stability target of 2% for the eurozone as a whole, preliminary data showed on Monday. .

A rise in short-term US borrowing costs is also in the spotlight, rising 2 basis points over two years to 1.20% after hawkish comments from Atlanta Fed Chairman Raphael Bostic , this week-end.

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The yield on Germany’s 10-year government bond, the euro zone’s benchmark, jumped 6 basis points to 0.017%, its highest level since May 2019.

2-year and 5-year rates rose by around 7 basis points, setting their highest since March 2019 and December 2018, respectively.

Portuguese government bond prices followed movements in the eurozone benchmark, with the 10-year yield rising 6 basis points to 0.68% after Sunday’s general election.

The centre-left Socialists won a parliamentary majority, securing a strong new mandate for Prime Minister Antonio Costa, a champion of balanced public accounts.

(Reporting by Stefano Rebaudo, editing by Angus MacSwan)

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