(Bloomberg) -- Italian bonds and stocks extended a rally after Prime Minister Giuseppe Conte confirmed plans to lower the budget-deficit target for 2019, a move meant to cool tensions with the European Union.
Yields on 10-year government debt fell to the lowest level since September, consolidating below 3 percent, after Rome proposed to cut the shortfall to 2.04 percent of output, from the previous goal of 2.4 percent that was rejected by the EU. The country’s benchmark share index headed for a two-day gain of more than 3 percent.
Rome’s conciliatory stance is stoking optimism the EU will delay or temper any disciplinary action planned against Italy for its failure to comply with the bloc’s rules. The nation’s bonds offer the highest investment-grade yields in the euro area and are trading at a significant discount to where they started the year. Speculation about early elections may also help support the securities, according to Commerzbank AG (DE:CBKG).
“Speculation about new elections and a budget compromise with the EU are supporting Italy sooner than we had anticipated,” Christoph Rieger, a rates strategist at Commerzbank, wrote in a note to clients. “The momentum may well carry on near-term.”
Italian 10-year yields dropped six basis points to 2.94 percent, the lowest level since Sept. 27. The spread over those on German bonds was at 265 basis points.
The European Central Bank is due to deliver its final monetary-policy decision of the year at 12.45 p.m. London time Thursday. Italian bond investors will be looking for any hints on the central bank’s reinvestment policy next year.