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UPDATE 2-Italian bonds come under pressure after stimulus report

Yoruk Bahceli
·2 min read

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices, adds background)

By Yoruk Bahceli

AMSTERDAM, March 2 (Reuters) - Euro zone bond yields edged up on Tuesday, with Southern European bonds led by Italy underperforming on reports that Italy's government might soon seek parliamentary approval for further stimulus spending.

After their worst monthly performance in years in February - when bets that U.S. stimulus would boost inflation and growth pushed yields higher - markets changed course on Monday, with bonds rallying, particularly in Europe and Asia.

After major benchmarks on Monday marked their best daily performance since June 2020, euro area bonds calmed on Tuesday.

Germany's 10-year yield, the benchmark for the region, was flat at -0.34%.

Southern European bonds came under renewed pressure, with Italian bonds underperforming. The 10-year yield rose 2 basis points to 0.69%.

Bond analysts attributed the move to a Bloomberg News report that, citing people familiar with the matter, said the Italian government may seek parliamentary approval for more stimulus spending as soon as next month.

There is also pressure on the Italian bond market from a green bond syndication expected in the coming days. Bond yields tend to rise ahead of sizable bond sales as investors make room for new supply.

Italy picked structuring advisors for the sale of its first ever green BTP, which will expire on April 2045.

Focus was also on euro zone inflation, which held steady as expected last month, a first estimate showed -- a break in what is likely to be a temporary but sharp spike in consumer prices in the coming months.

"For anyone in doubt: the (European Central Bank) is clearly not concerned about being behind the curve at the moment. They will see these inflationary drivers as largely fleeting," said Bert Colijn, senior economist, euro zone at ING.

"The big concern is around the higher bond yields that have been driven by developments in the U.S. Because of that, we expect the ECB to increase asset purchases and address the rising bond yields at next week’s meeting."

The ECB's weekly bond buying data released on Monday showed a slowdown in net purchases during last week, while many called for an increase.

It's unclear whether the ECB acted towards the end of last week, which isn't covered by Monday's data.

The ECB should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down, ECB board member Fabio Panetta said on Tuesday, after weeks of steady increases in borrowing costs.

The bank's vice president, Luis de Guindos, said the ECB is open to recalibrating its programme if it concludes the rise in nominal yields will have a negative impact on financing conditions. (Reporting by Yoruk Bahceli; editing by Jonathan Oatis)