Bond yields in Italy hit three-week lows on Wednesday, after an accord between the country and the European Commission to help Italian banks sell some of their €200 billion of bad loans eased concerns about the banking sector.
Italy’s 10-year bond yield fell 3.6 basis points to 1.48%, outperforming eurozone peers ahead of a US Federal Reserve meeting later in the day, Reuters reported.
The deal between the European Commission and Italy, announced late on Tuesday, ends almost a year of often-tense negotiations. The details are still being finalized, but Italian Economy Minister Pier Carlo Padoan said the scheme is “a very useful instrument” based on state guarantees.
Accumulated during a three-year recession between 2012 and 2014, the non-performing loans tie up banks’ capital and hold back new credit that could fuel a fledgling economic recovery.
“Now we have this agreement, the risk of an Italian banking crisis has eased,” said Daniel Lenz, a strategist at DZ Bank.
Italian bank shares have suffered heavy losses this year over fears that no effective way would be found to fix the bad loan problem.
Those worries had spilled over into the bond market, helping push the yield gap between 10-year Italian bonds and top-rated German Bunds last week to its widest since August 2015.
But the outperformance of Italian bonds on Wednesday helped narrow the Italian/German yield spread to about 112 basis points, down 11 basis points from last week’s high.
DZ Bank’s Lenz said Italian bonds could outperform Spanish peers in the weeks ahead.
Germany’s 10-year bond yield fell to its lowest level in almost nine months at 0.35% and two-year yields touched a new record low at minus 0.46%.
Yields across the eurozone were 1-3 basis points lower, supported by expectations of further monetary easing from the European Central Bank.
