Italy's 10-year bond yield hovers at record lows as political uncertainty eases

Italy's 10-year bond yield hovered around record lows and the closely watched gap over German Bund yields fell to its lowest since early 2015 on Friday, as Mario Draghi looked set to take office at the head of an Italian government of national unity. Having secured the endorsement of almost all Italy's political parties, the former European Central Bank head was likely to present his list of ministers to President Sergio Mattarella on Friday and unveil his policy programme next week in parliament.

Italian borrowing costs, which have fallen sharply since Draghi was tasked with forming a new government last week, were poised to end the week on a strong footing. The 10-year government bond yield hit a new all-time low at 0.442%, and was last down around 1.5 basis points on the day.

The closely-watched Italian/German 10-year yield spread was trading around 89 basis points, its lowest level since early 2015. It has narrowed 26 bps this month, reflecting reduced risks of holding Italian debt. The sharp fall in borrowing costs also fuelled speculation in markets that Italy could take advantage of the favourable backdrop to issue ultra-long debt.

"Given the prevalent optimism surrounding Italy, in particular long end (euro area) rates could see continued steepening pressure as Italy could seize the opportunity to launch a new (ultra) long bond this month," ING strategists wrote in a report. European Commission Vice President Valdis Dombrovskis said on Friday he was confident a Draghi-led government would successfully complete the remaining steps for funds from the Recovery Fund to be released quickly.

"The BTP-Bund (spread) saw even more tightening on Thursday, and the promising sign for Italy is that this was a bull-tightening. We see value until around 85bp, and beyond that if a rates selloff accelerates," Mizuho strategists said in a note. With a light data calendar on Friday and many markets in Asia closed for the Lunar New Year holiday, trade across financial markets was subdued. Core euro zone bonds yields edged up.

"Risk sentiment should remain supported, but the upside to rates is dampened as the Lunar New Year also curbs the prospects for primary market activities," ING strategists added. Germany's 10-year bond yield was up 0.5 bps at -0.454%, off Thursday's one-week low at -0.474%.

U.S. Treasury yields rose on Thursday after the Treasury Department saw soft demand for a sale of new 30-year bonds.

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