Bonds: Italian risk premium at highest since 2014

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These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 2.32% (-5bp)
UK: 1.05% (-2bp)
Germany: 0.20% (-0bp)
France: 0.96% (+3bp)
Spain: 1.64% (+3bp)
Italy: 2.28% (+4bp)
Portugal: 3.85% (+3bp)
Greece: 6.72% (-6bp)
Japan: 0.04% (-2bp)
Longer-term Gilts tagged along for the ride with debt from the other G4 economies, as heightened tensions around the Korean peninsula saw traders seek out the relative safety of government bonds, pushing yields lower.

In the process, traders in London shrugged off a lower-than-expected reading on the core UK CPI for March, which analysts at Barclays attributed to a dip in volatile airfare prices ahead of Easter.

Core CPI declined by 0.2% on the month to 1.8%, undershooting forecasts for a rise of 1.9%.

“We remain of the view that underlying inflation has momentum even if core inflation surprised to the downside today given that the main driver was the airfare component ahead of Easter which is likely to rebound in April. Elsewhere, in fact, services inflation was largely unchanged versus February while non-energy industrial goods prices have momentum supported by lagged currency depreciation,” Barclays said.

Across the channel it was a different story as the looming French elections pushed yields spreads between benchmark periphery issues at the 10-year tenor wider against those on bunds, albeit admittedly on the back of lower than usual trading volumes.

Against that backdrop, some market commentary focused on Italian bonds and not French, pointing out how the risk-premium versus Germany was now at its highest since 2014.

Similarly-dated US Treasuries on the other hand fell back towards the previous week’s lows, amid some mixed second-tier economic data Stateside, although economists drew comfort from the details of those reports.

A case in point was the latest US JOLTS survey, which showed the rate of job openings tick higher to 3.8% for February.

That, Capital Economics said, was proof that labour market slack in the States was continuing to diminish despite the slowdown in payroll employment.

On Monday, the Fed’s labour market conditions index for the month of March also rose, even if only slightly, but nevertheless notched up a tenth consecutive monthly advance, Deutsche Bankpointed out.

Perhaps, despite which on Tuesday some of the more bearish fixed income strategists weighed in with rather bullish forecasts for Treasury prices.

“We believe the equilibrium level for US yields is lower than current levels and remain bullish on the 10-year US Treasury segment, favouring a curve flattening bias,” HSBC told clients.

HSBC was preceded over the weekend by Dominic Konstam at Deutsche Bank who estimated that the ‘fair value’ for 10-year US Treasury note yields lay somewhere closer to 2.25% in the near-term.

However, by year-end Konstam saw the 10-year yield at 2.75% on the back of at least “some progress” in the US on cutting taxes.