The risk premium on Italian debt fell on Thursday after the European Central Bank (ECB) maintained interest rates and said it would continue to reinvest proceeds from the Pandemic Emergency Purchase Program (PEPP) until the end of next year.

The spread between Italian and German 10-year bond yields fell to 197 basis points (bps), after reaching 202 bps before the decision.

The gap reflects investor sentiment towards the euro zone’s most indebted countries, and reached its widest level since January earlier this month at 209 bps, a sign of nervousness over the increase of the Italian budget deficit.

The euro fell 0.28% to $1.0533 at 2:10 p.m. GMT, compared to $1.054 before the decision.

The yield on the German 10-year fell after the decision to 2.848%, compared to 2.891% before it.

The yield on the Italian 10-year bond fell to 4.852%.

“Someone in the market clearly expected the ECB to reduce its investments in government bonds, but this is not the case since the ECB maintained its investment stance at least until the end of 2024,” notes Nick Chatters, bond manager at Aegon Asset Management.

“Italian and Greek bonds have appreciated continued support from the ECB as spreads have tightened, which is a good thing for Italian debt financing dynamics.”

ECB President Christine Lagarde said the Governing Council did not discuss the PEPP at the October meeting.

Some analysts believe an early reduction in the program, which has been mooted by some members of the Governing Council, could lead to a rise in Italian bond yields, as the ECB’s purchases have been a particularly strong support for the country’s debt during the last years.

Investors also reacted to the acceleration in US GDP.

The benchmark STOXX 600 index rebounded but remained down 0.59%, compared to a decline of 0.8% before the ECB’s announcement.

(Report Harry Robertson, Corentin Chappron, edited by Jean-Stéphane Brosse)

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