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Dovish ECB keeps Italy bond yields at lowest in almost 8 weeks

·2 min read

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, June 14 (Reuters) - Italy's 10-year sovereign borrowing costs were pinned at their lowest levels in almost eight weeks on Monday, with a view that the European Central Bank is in no rush to taper its aggressive emergency stimulus supported by comments by its president.

The euro zone economy is at a turning point but its recovery must be firm and sustainable before the central bank can debate clawing back emergency support, ECB President Christine Lagarde told Politico in an interview.

The ECB last week agreed to maintain an elevated pace of bond purchases to keep borrowing costs ultra low and policymakers did not entertain questions about tapering support, even as the economy rebounds from the COVID-19 shock.

This backdrop has supported euro zone bond markets in recent days, allowing yields to fall further.

Italy, one of the biggest beneficiaries of ECB bond-buying, has led the way.

Its 10-year bond yield touched 0.74% in early Monday trade , its lowest level in almost eight weeks.

Rainer Guntermann, rates strategist at Commerzbank, said a brighter economic outlook for Italy where the central bank on Friday revised up its 2021 growth outlook to close to 5%, was also boosting sentiment.

"BTPs (Italian bonds) continue to outperform, helped by upbeat GDP projections from the Bank of Italy on Friday, and 10-year BTP-Bund spreads are flirting with the 100bp level with the February-lows at 90bp also moving in sight," he said.

The closely-watched gap between Italian and German 10-year bond yields was at 102 basis points on Monday.

Most 10-year bond yields were steady but holding near recent lows -- Germany's benchmark 10-year bond yield was at -0.28%, about 1 bps off multi-week lows hit on Friday.

The market spotlight was also on the European Union, which is expected to issue its first bond to raise funds for the 800 billion euro ($968 billion) post-COVID Recovery Fund as early as this week.

The EU is set to become one of the world's biggest issuers with 80 billion euros worth of bonds for the recovery fund sold this year.

Most analysts expect the EU to kick off with a 10-year bond with a volume in the region of 11 billion euros. ($1 = 0.8261 euros) (Reporting by Dhara Ranasinghe; Editing by Emelia Sithole-Matarise)