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“Flight to Yield” Increases Investors’ Demand for Italy’s Government Bond

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Italy’s 10-year bond fell to its lowest level since October last year when investors’ interest in the bond increased as demand in the world markets also improved.

In the past week, demand has increased as a result of fears of the economic impact of the coronavirus outbreak in China. Even when stocks have been sold off, demands for government bonds have continued to soar higher, and investors are looking into the direction of the bonds for financial security.

“Flights-to-yield” soaring

According to Commerzbank analysts, “flight to quality” is underperforming as “flight-to-yield” dominates the market. This is a phrase usually used to describe the increased demand for high valued assets that are considered very safe during times of financial uncertainty.

As almost all the eurozone government market bonds are yielding negative returns, auctions or selloffs are usually seen as a chance to buy bonds that actually offer better positive yields. Investors in government bonds are considering the option of selling off their negative-yielding bonds to invest in any positive yielding one, and the Italian government bond is seen as a viable option.

Barclay’s Data Shows $12 trillion Worth of Bonds Trading at Sub-Zero Levels

France and Greece among countries attracting more orders

There was a record order for Greece bond on Tuesday for the 15-year old Greek bond. Also, France’s 30-year old bond attracted more demands as it was sold through a syndicate of banks on Tuesday. The demand for the bond reached an unprecedented level of 38 billion euros.

There has been a boost for southern European bonds because of a series of political developments. Italy’s right-wing league failed to win any important role at the regional election last week. Also, there was a rating upgrade on Friday for Greece, which has helped to raise more interest in the southern European bonds.

German bond not doing so well

The projection for the German bond market is looking grim because of the negative yields backdrop as well as the sentimental feelings that it may remain so for a long time. According to Commerzbank financial strategist, this would have a negative impact on the demand for German bonds. In particular note, there are some specific factors, which include the upgrade of the credit ratings in Italy and the regional election held in Italy last week.

The 10-year bond in Italy fell to 0.994pc, which is down by 4 bases. Unsurprisingly, this is the lowest level since October last year. On the other hand, the gap between the German bond and the Italian Bond yields closed around 134-bps, which is the closest since September last year.

Some financial analysts at Mizuho opined that the result could even tighten further than the current level. They added that the Italian yield could fall further from the p[resent level of 2pc to 1.5 pc later in the year.

Ahead of the decision on the U.S Federal Reserve later in the day, there were subdued expectations of trade across the eurozone markets.

It is expected that the Fed may still maintain the current rates, but officials will make a decision on the management of the overnight borrowing rate by the U.S. central bank.

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Ali Raza

A journalist, with experience in web journalism and marketing. Ali holds a master degree in finance and enjoys writing about cryptocurrencies and fintech. Ali’s work has been published on a number of cryptocurrency publications.