 "Italy Flag")
The risk premium investors demand to hold Italian debt fell to its lowest since April 2022 on Friday as investors boosted their bets on interest rate cuts after the European Central Bank held rates steady on Thursday.
The gap between Italian and German 10-year bond yields fell to 149.3 basis points, the lowest since April 1, 2022, before widening slightly to 151 bps.
Italian bonds have benefited from investors' hopes that interest rates will fall sharply this year, reducing pressure on the euro zone's more indebted countries.
"The trends in Italy are broadly similar to what we see in the rest of Europe," said Roger Hallam, global head of rates at Vanguard. "The ECB policy risks are much lower." Germany's 10-year government bond yield, the euro area's benchmark, was last unchanged at 2.28%, after falling 5 bps on Thursday.
The yield, which moves inversely to the price, hit a two-month high of 2.371% on Thursday before the ECB, but remains well below October's peak above 3%.
ECB euro short-term rate forwards showed that traders expect 143 basis points of rate cuts in 2024, from around 140 bps late on Thursday and 130 before the ECB press conference.
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Italy's 10-year government bond yield was last down 2 basis points (bps) at 3.802%, after falling 8 bps on Thursday.
Yields barely budged after data showed U.S. inflation, as measured by the personal consumption expenditures index, came in at 2.6% year-on-year in December, the same rate as November and in line with economists' expectations.
The ECB held interest rates at a record-high 4% on Thursday and reaffirmed its commitment to fighting inflation.
Yet euro zone bond yields fell as investors noted that ECB President Christine Lagarde stressed the progress in tackling inflation and did not explicitly push back on market expectations for heavy rate cuts.
"This is the ECB providing forward guidance, somewhat unwillingly," said Florian Ielpo, head of macro at Lombard Odier Asset Management.
"When mentioning how March will be the occasion to decide on a pivot, it gives market satisfaction when it comes to its expectation of a cut around summertime." Germany's 2-year bond yield, which is sensitive to interest rate expectations, was down 1 bp at 2.609%, after falling 9 bps on Thursday.
Money markets priced an 85% chance of a first 25 bps rate cut in April, up sharply from around 60% on Wednesday before the ECB and jobless claims data which suggested the U.S. jobs market could be slowing on Thursday.
Euro zone inflation could fall faster than expected this year, a raft of surveys and indicators showed on Friday.
Yet ECB official Martins Kazaks, who is seen as a hawk on inflation, said on Friday the worst mistake would be cutting rates too early.
