Bonds: Periphery bonds gain despite reports of market stress in Italy
These were the movements in the yields of some of the most widely-followed 10-year sovereign bonds:
US: 2.90% (+4bp)
UK: 1.28% (+5bp)
Germany: 0.39% (+4bp)
France: 0.71% (+4bp)
Italy: 2.69% (-10bp)
Spain: 1.44% (-6bp)
Portugal: 1.88% (-10bp)
Greece: 4.51% (-8bp)
Japan: 0.05% (+1bp)
Gilts succumbed to profit-taking on the back of solid readings on two key US economic reports on Friday, even as the risk of snap elections in Italy and Spain receded, helping to narrow the spread between euro area periphery debt and the generally safer sovereigns of core EU countries, as well as the US and UK.
According to the Bureau of Labor Statistics, the US economy generated 223,000 jobs during the month of May, beating forecasts calling for an increase of 190,000.
In parallel, average hourly earnings were 2.7% higher year-on-year, as analysts had correctly anticipated.
Economists at Pantheon Macroeconomics and Capital Economics both labelled the report as "solid", pointing to the broad-based gains in hiring across sectors.
The former also highlighted that a couple of statistical quirks may have weighed on the wage data.
Taking a more middle-of-the-road view, analysts at Barclays Research told clients: "Altogether, we read this report as modestly stronger than expected, but not so much so as to lead FOMC members to believe they are falling behind the curve.
"We see this report as consistent with the Fed’s optimistic view on the near-term outlook for the US economy and another 25bp increase in the federal funds rate in June and, more broadly, the desire to normalize its policy stance gradually."
Also on Friday, the Institute for Supply Management reported that its US manufacturing sector purchasing managers' index improved from a reading of 57.3 for April to 58.7 in May (consensus: 58.1).
Periphery bonds on the other hand were higher, although they closed off their best levels of the day, with yields on Italian and Spanish 10-year debt having hit intraday lows of 2.53% and 1.32%, respectively.
Indeed, earlier in the day, strategists at BoA-ML had cautioned that: "We have learnt these weeks that Italy politics are complicated and highly volatile. [...] The key point for us is that the new parliamentary majority does not share the "Brussels consensus" of fiscal restraint and supply-side reforms.Even if "Italexit" is unlikely,in our view, the attention is back on the Euro area's structural defects. Notably, we think that the Italian headlines make it harder to find support for the completion of the monetary union."
Linked to the above, overnight the Italian Treasury disclosed it had repurchased €500m-worth of four government bond issues on Thursday.
Those purchases came amid a surge in short-term Italian government debt yields and, according to some accounts, amid a complete lack of buyers and even of bid quotes.