LONDON- Italian government bond yields hit a new three-month low on Tuesday as the European Central Bank said it would chart a new policy path as early as next week, further boosting demand for euro zone government debt.
Euro zone policymakers said on Monday that the central bank would reflect its change of strategy - which includes a changed inflation target and more emphasis on asset purchases - in its very next meeting to show it was serious about reviving inflation.
"The ECB is able and willing to provide more stimulus for longer and that is what is being reflected in the market - lower yields and tighter spreads," said Commerzbank rates strategist Rainer Guntermann.
Indeed, euro zone borrowing rates were down 1-2 basis points across the board on Tuesday. And Italy, one of the lowest rated of the larger euro zone nations, was a particularly strong performer, with 10-year yields dropping 2 bps to a new three-month low of 0.72%.
Others, such as France and Belgium, also saw their 10-year borrowing costs drop 1.5 bps to 0.03% and 0% respectively.
Demand for European government debt was also apparent in debt sales, with the European Union garnering more than 128 billion euros of demand for a dual-tranche 10-year and 20-year syndicated bond sale, according to a lead manager.
It plans to raise 5.25 billion euros from the 10-year tranche and 10 billion euros from the 20-year tranche, according to a message to investors seen by Reuters, with final pricing expected later on Tuesday.
German and U.S. government bond yields also held near recent lows ahead of the release of U.S. consumer price data, with inflation in the world's biggest economy widely expected to tick marginally lower from last month.
A Reuters poll shows expectations are for inflation in the United States to come in at 4.9% for the month of June when the data is released at 1230 GMT, compared with 5% the month before.
Even though the so-called "reflation" trade - inflation fuelled by fiscal stimulus - has lost steam in recent weeks, analysts still believe this is one of the most important data prints for markets at the moment.
"The last couple of releases have both surprised to the upside, which in turn prompted the Fed to shift in a hawkish direction and pencil in a couple of rate hikes for 2023," said Deutsche Bank macro strategist Jim Reid.
He said observers would be watching to see whether price pressures were coming from areas associated with the reopening of economies after the COVID-19 pandemic or were spreading to other categories that could signal a more permanent increase.
(Reporting by Abhinav Ramnarayan; Editing by Timothy Heritage and Alex Richardson) ((Abhinav.Ramnarayan@thomsonreuters.com; 0044 751 745 1044; Reuters Messaging: Twitter: @abhinavvr))