Italian govt bond yields soar, budget tensions weigh

(London) REUTERS: Italian government bond yields jumped to one-month highs yesterday, pushed up by risk aversion on global markets triggered by sharp tech stock-led losses on Wall Street, tensions over Brexit and concerns about the Italian budget.

European stock markets opened in the red after poor overnight trading in Asian equities, leading to a broader move lower in high quality European government bond yields.

Germany’s 10-year bond yield, the benchmark for the region, hit a more than three-week low at 0.347 percent.

The slump in global equity markets was led by sharp losses on Wall Street as technology firms tumbled on worries about slackening demand.

In addition to broader risk aversion, Italy’s standoff with the European Union over its 2019 budget added upward pressure to Italian government bond yields, helping to push Italian bank stocks to a two-year low,

A poor initial reception for a new ‘BTP Italia’ bond on Monday added to the downbeat mood.

Italian bond yields rose as much as 13 basis points, with five-year yields rising to 2.97 percent, and those on 10-year bonds reaching a one-month high of 3.70 percent.

The moved pushed the Italy/germany 10-year yield gap to a one-month wide of 333 basis points, up from 322 basis points late on Monday.

A solution with the European Commission over Italy’s budget can be found but the main measures contained in it must not be touched, Deputy Prime Minister Luigi Di Maio said yesterday. He added that Italy was paying the consequences of the EU being a “stonewall” over the budget.

“The comment by Di Maio saying EU acting like a stone wall did not sound like compromise, in general (there are) growing concerns about the response of the EU Commission which is due tomorrow,” said Daniel Lenz, rates strategist at DZ Bank. “Investors are even more worried than they previously were.”

The European Commission is due to present its feedback on Italy’s revised budget plans for 2019 on Wednesday, and is expected to respond negatively to the changes, which could pave the way for the EU to launch an excessive deficit procedure. Italy’s Treasury continues to offer a new-four year BTP Italia bond to small domestic investors but orders for the new bond on Monday totalled a lacklustre 481.35 million euros on the first day of offering, Italian bourse data showed.

“If locals are holding back, that is not a good sign,” said ING rates strategist Martin van Vliet.

Budget concerns also kept upward pressure on Spanish government bond yields with its 10-year government bond yield edging up to 1.67 percent. It appears likely that Spain’s minority government will be unable to pass the 2019 budget, and some reports mentioned the possibility of an early general election in May 2019, wrote Rabobank analysts in a note.

Elsewhere, core European government bond yields were down around one basis point with even Ireland’s government bond yields pulling back from near one-month highs despite Brexit uncertainty.