Italy bond yields plummet as ECB rate cut expectation builds

Investors expect the ECB to cut the rate by more than 1.5% next year but officials say markets are getting ahead of themselves

Thu, 21 Dec, 2023 - 17:19

Italy's benchmark bond yield hit its lowest level in 15 months as the government bond market rally continued despite central bank officials' efforts to rein in the exuberance.

The Italian 10-year yield, which moves inversely to the price, fell to 3.55%, the lowest since late August 2022. It is on track for its biggest monthly fall since 2013, at 64 basis points.

Yields or interest rates on government borrowing have tumbled in November and December as inflation in the US and Europe has fallen sharply and central bankers have said interest rate hikes are almost certainly over.

Germany's 10-year bond yield, the benchmark for the eurozone as a whole, hit a fresh nine-month low of 1.94%, while Ireland's equivalent yield also fell, to 2.26%.

"It just seems like no one's been willing to stand in the way of this [rally] and you do wonder is that partly because it's year-end and no one really wants to get cut out," said Lyn Graham-Taylor, rates strategist at Rabobank.

"It's always difficult at this time of year reading too much into stuff, just because you do get these outsized moves based on thin liquidity."

Investors expect more than 1.5% worth of interest rate cuts from the European Central Bank next year and a similar amount from the US Federal Reserve, although officials have said markets are getting ahead of themselves.

Expectations for lower interest rates - and therefore government borrowing costs - have been a balm for Italy, which has a pile of public debt worth around 140% of GDP.

Bond investors had some final reading: The details of the EU's fiscal rules. At the behest of Germany, the rules say countries should reduce debt each year and the old benchmark targets of a 60% debt-to-GDP ratio and 3% deficit remain in place.

Yet they are more lenient than those that were suspended before the pandemic and contain various caveats, with many countries' debts and deficits far above those levels.