Italian govt bond yields rise from early drop after reports of help from Trump

Italian bond yields rose on Friday after a brief move lower in early trade following a report that Trump had offered Italy to help with its public debt, while worries about trade and U.S. politics pulled other euro zone bond yields marginally higher.

Asian risk assets and Wall Street posted small overnight losses after trade talks between the United States and China ended with no breakthrough and further tariffs on $16 billion worth of each country's goods were introduced on Thursday.

Strategists struggled to make sense of Il Corriere della Sera's report that Trump had told Italian Prime Minister Giuseppe Conte at a meeting in Washington in July that the United States was ready to help Italy with its debt next year.

"This is clearly dominating headlines this morning and it probably explains the pop at the open, but traders who look into the details of this should be quick to fade the move," said Commerzbank's head of rates strategy Christoph Rieger.

"I would be cautious though as the U.S. has no sovereign wealth fund and neither the U.S. Treasury nor the Fed have any mandate for such interventions."

Matt Cairns, rates strategist at Rabobank, said that it was more likely that the United States will look to boost investment in the Italian economy, possibly in infrastructure projects.

"That would benefit from the new government’s planned, favourable tax regime aimed at boosting foreign investment in the Italian economy," he said.

The yield on Italy's benchmark 10-year government bonds dropped two basis points to 3.08 percent in early trade. The benchmark had been one of the best performing in the euro zone in the first half of the week, with yields falling from 3.14 percent on Monday to reach lows of 2.937 percent on Wednesday.

The bid for Italian debt, which offers one of the highest yields in the euro zone, was caused as much by the lack of negative news flow, according to Cairns, as it was by Moody’s decision to postpone a ratings review on the sovereign.

Markets will listen closely to a speech by Federal Reserve Chairman Jerome Powell later on Friday after minutes from the U.S. central bank's most recent meeting showed that further interest rate hikes are likely soon.

But the anticipation of Powell's speech barely moved U.S. Treasuries on Thursday as expectations that the Fed will hike rates in September remained stable.

German bunds remain off recent lows after Eurozone PMIs failed to excite yesterday. Recent data has shown all sectors of the German economy grew in the second quarter.