* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds details)
By Yoruk Bahceli
LONDON, June 1 (Reuters) – Italian bond yields edged down on Monday as markets prepared for Thursday’s European Central Bank meeting, after posting their best monthly performance since January.
Economists expect the ECB to increase its bond-buying, probably by 500 billion euros. The purchases have been a key factor holding down Italy’s borrowing costs.
“The ECB Council meeting dominates the week and will be most important for spreads,” Commerzbank analysts told clients, referring to bonds from the likes of Italy that pay a premium over Germany’s.
Italian 10-year bond yields remained at near two-month lows early Monday, down 3 bps to 1.46%. The risk premium they pay over their German equivalents was at 185 bps, down 4 bps on the day.
That comes after they notched their biggest monthly fall in four months in May, boosted by the likelihood the country will get grants from the European Union to support its coronavirus-hit economy.
UniCredit analysts noted that, in addition to the EU’s recovery fund proposal, which would offer 500 billion euros of grants to benefit the worst-hit economies like Italy, statements by ECB policymakers that they would apply capital keys in a flexible manner have fed the rally in Italian bonds.
The bank is able to apply the capital key – which governs how it allocates its purchases based on each country’s shareholding in the ECB – flexibly for its emergency purchase programme.
But analysts also caution that, given Italy’s recent rally and the expectations from the ECB priced in, there is scope for disappointment, while lower yields may also induce investors to take profits.
Safe-haven German 10-year bond yields rose 2 bps to -0.43%, echoing risk-on moves in stock markets, which focused on the opening up of economies, with relief from the United States, which left the China trade deal intact.
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