* Italian 10-year returns set for first weekly drop since March
* Too early to discuss the liquidation of the PEPP – Lagarde
* Eurozone bonds could stabilize after liquidation (adds Lagarde comments, updates prices)
May 21 (Reuters) – Italian yields were set for their first weekly decline since March on Friday and other eurozone bond yields extended their decline, supported by accommodating comments from European Central Bank President Christine Lagarde .
Less than two weeks before the next ECB policy meeting, Lagarde said it was too early to discuss ending the bank’s emergency bond buying pandemic, helping to further stabilize the economy. euro area public debt after a recent liquidation.
The bloc’s bond yields rose this quarter as COVID-19 vaccinations accelerated, raising uncertainty as to when the ECB will slow down these purchases.
Lagarde said the ECB was monitoring borrowing costs closely, wording that usually signals concerns.
Yields on Italian bonds, the main beneficiary of pandemic buying and which had recently underperformed their peers, fell further on Friday, with the 10-year yield falling 4 basis points to 1.02% at 12:58 GMT.
10-year yields are expected to end the week 5bp lower, the first weekly decline since the week ending March 26.
The closely watched risk premium on German debt fell to around 115bp on Friday, from nearly 125bp earlier this week.
Other 10-year bond yields also extended their decline after Lagarde’s remarks. German 10-year yields, the block’s benchmark, fell 3bp to -0.14%, set for their biggest daily decline in 2-1 / 2 weeks.
The acceleration in euro area business growth above expectations, at its fastest pace in more than three years in May, failed to dampen Friday’s bond rally.
“I think we should be in a period of stabilization – the spreads had moved too far in anticipation of higher inflation, lower ECB, etc.,” said Jens Peter Sorensen, analyst in chef at Danske Bank.
“But (the) ECB is still overflowing the market with liquidity and bond purchases, the Federal Reserve is on hold, most (eurozone government bond) issuers have reached over 50% of the issuance target this year, we have fiscal consolidation with the EU stimulus fund … So many supporting factors are moving forward. “
Rabobank analysts noted that real inflation-adjusted yields rose as market inflation expectations fell, a scenario that involves an unwarranted tightening of financial conditions. This lowers the risk that the ECB will slow down its bond purchases in June, Rabobank said.
Later Friday, Moody’s will review Greece’s credit rating, the lowest among major rating agencies, three notches below investment grade territory.
The review comes after S&P upgraded Greece in April, raising hopes of a return to investment grade status.
Reporting by Yoruk Bahceli; Editing by Louise Heavens and Emelia Sithole-Matarise