Italian debt is heading towards one of its best weeks since the euro zone debt crisis as the Italian anti-austerity government's apparent willingness to curb budgetary excesses has the market sighing with relief.
Italian debt rallied heavily in the first three days of the week on remarks from Italian ministers that suggested spending in 2019 would remain within European Union rules.
On Thursday it largely held on to those gains, with five-year and 10-year yields dropping further.
"There are a lot of hopes on the markets that it will agree a budget below 3 percent (of GDP) and I think we will see a lot of headlines in the next few days confirming that," said DZ Bank strategist Sebastian Fellechner.
Deputy Italian Prime Minister Luigi Di Maio said on Wednesday the forthcoming 2019 budget would be "courageous", but would nonetheless keep state accounts in order.
Budget talks between officials in Italy's ruling coalition of the anti-establishment 5-Star Movement and far-right League are set to continue today, with more headlines likely to emerge as officials brief the media on these talks.
Italy's 10-year bond yield fell another four basis points to 2.90 percent, making it a 34 basis point drop for the week so far.
Barring the week commencing June 11 this year -- when that yield fell over 50 bps -- this would make it the best week for Italian 10-year debt since September 2012, back when the European Central Bank stepped in with strong measures to tackle the euro zone debt crisis.
Italy's five-year borrowing costs shed 3.5 bps to 2.14 percent and two-year yields were flat at 1.06 percent; both down more than 40 bps this week so far.
Yields are still well above the levels of April and early May, when Italy's 10-year borrowing costs went as low as 1.71 percent.
Investors have heavily sold off Italian bonds since the new government took office in June on concerns that the coalition may implement budget plans that would put the country's already-huge debt pile under strain and breach EU fiscal rules.
And they will remain cautious over the anti-establishment government's stance on spending and on EU membership.
"Even if they agree on a (EU-friendly) budget now, the topic is not off the table. It will accompany us during the next year, because they could hit higher spending at any time citing extraordinary circumstances," said Fellechner of DZ Bank.
Other euro zone bond yields edged higher, adding to a week of rises. Germany's 10-year government bond yield, the benchmark for the region, inched higher to 0.38 percent, up five bps for the week so far.
But that yield could come under downward pressure as the session wears on, with the United States possibly announcing a fresh round of tariffs, which could fuel a bid for safe assets such as government bonds.
