Italian debt faces fresh selling, widening yield gap with Germany

Italian government bonds were under pressure on Friday and a key measure of investor concern over the attractiveness of its debt climbed, with investors eyeing the fraught political situation and bracing for an upcoming European Central Bank meeting.

The country’s 10-year bond yield rose 5.5 basis points (0.055 percentage points) to 3.068 per cent. (Yields rise when prices fall).

A fall in the yield on the equivalent German Bund brought the gap between the two to 2.633 percentage points. The jolt higher in the Italy-Germany spread, seen as a proxy for the risk premium demanded to hold the Italian paper, brings it closer to the 2.828 percentage points closing level hit during last week’s turbulence.

Looking at the shorter end of the curve, the two-year Italian yield rose 20.3 bps to 1.712 per cent. It is still well off last week’s highs above 2 per cent, but the bond is on track to post its largest weekly rise in yield since 2012, Reuters data show.

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Several factors are affecting sentiment on Italian bonds, according to analysts. Strategists are uncertain over how the newly-formed populist government will work with Brussels, and also over its fiscal plans.

At the same time, a string of hawkish speeches from ECB policymakers earlier this week have revved up expectations that the central bank will announce next week the end of its bond buying programme. Quantiative easing has been a boon to euro zone government debt, helping push yields lower.

Copyright The Financial Times Limited 2018