Government bonds boosted by unease over Italian bank rescue plan

Eurozone bond yields fell across the board on Wednesday as concerns about the strength of a rescue plan for Italian banks pushed investors to the safety of government debt.
Germany’s 10-year yields hit their lowest in seven weeks in early trade, and other eurozone equivalents were also in demand.
On Monday, the European Central Bank told ailing Italian lender Monte dei Paschi di Siena that its capital shortfall had risen to €8.8 billion ($9.2 billion) from the €5 billion indicated previously.
This raised questions about whether the €20 billion earmarked by the Italian government would be enough to cover the funding requirements of all the country’s banks.
An Italian Treasury source told Reuters this week that the amount would be enough, but investors are still concerned, said DZ Bank strategist Andy Cossor.
“The latest news about the Italian banking system may well be pushing investors into the safe haven of the Bund market,” he said.
“...The Italian government is putting aside €20 billion and there are questions marks over whether this will be enough. The market would like to have some clarity.”
Germany’s 10-year bond yield hit 0.18 percent in early trades, the lowest since Nov. 9, before edging back up to 0.19 percent by 1120 GMT.
“Also, good quality safe haven assets are usually in demand at the year end — investors want to close their books with some safe assets in them,” said Cossor.
The broad rally in eurozone government debt also saw Italian bond yields edge lower to 1.83 percent.
Standard & Poor’s said on Wednesday it did not expect any immediate effect on Italy’s sovereign rating following the government’s decision to set up the €20 billion fund.
Highlighting the divergence between the US and Europe, 10-year US Treasury yields rose overnight to 2.56 percent after US consumer confidence hit its highest level in more than 15 years in December.
The gap between benchmark German and US yields hit a high of 237 bps on Wednesday. The spread has been increasing recently on the divergence between European and US central bank policy and outlooks for growth and inflation.

Source:  Arab News