Bonds: Italian lenders' risk spreads narrow sharply

These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 2.39% (-0bp)

UK: 1.42% (+2bp)
Germany: 0.37% (+4bp)
France: 0.81% (+2bp)
Italy: 1.94% (-4p)
Spain: 1.49% (-6bp)
Greece: 6.74% (+20bp)
Japan: 0.05% (+1bp)
Portugal: 3.64% (-6bp)

Eurozone periphery debt outperformed on Tuesday led by a rally in sentiment towards Italian bank debt that left some traders expressing surprise.

In turn, that move drained some of the haven demand for similarly-dated Gilts and Bunds.

Italian government debt was among the best performing, although gains were eclipsed by the sharp tightening in credit spreads, with even some veteran market watchers expressing surprise at the suddeness of the moves, possibly as some traders were forced to cover short positions after markets failed to retreat after ex-Prime Minister Matteo Renzi's constitutional referendum.

A 8.97% jump in the FTSE Italia All-Share Banks index pushed the FTSE Mibtel higher by 4.15%, alongside a four basis point tightening move in the iTraxx Main index while credit spreads for UniCredit and Generali dropped by 18 and 16 basis points, respectively.

Acting as a backdrop, investors were waiting on the result of the European Central Bank's policy meeting in two days' time.

Economists were still forecasting the ECB would announce a further extension of its quantitative easing programme, although some analysts cautioned it might taper its QE sooner than expected if the euro area continued to benefit from sustained weakness in the single currency.

“The signs of steady fourth quarter growth and indications that inflationary pressures are rising will be unlikely to deter the ECB from extending its QE programme at its December meeting.

"But the extent to which the Eurozone is benefiting from the weaker euro in particular, if sustained, will raise the likelihood of stimulus being tapered earlier than previously anticipated,” Markit's chief business economist Chris Williamson said in a report sent to clients on 5 December after the survey compiler released its composite Eurozone PMI for November.

It was also a heavy day for debt issuance from US energy outfits looking to capitalise on narrowing credit spreads in their own corner of the market.

Chesapeake Energy, Matador Resources, Rowan Companies and Parsley Energy all priced deals after Cheniere Energy did the same on Monday.

Since the last OPEC meeting, cash spreads on US high yield debt were 32 basis points tighter at 510, their tightest since November 2014 and far lower than the 1,900 basis point differential seen in February, Deutsche Bank pointed out.

In terms of economic data, US third quarter unit labour costs were revised up from a preliminary estimate of a gain of 0.3% quarter-on-quarter to 0.7%.