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Italy's bond yields rise as budget tensions weigh

Published 11/20/2018, 09:39 AM
Updated 11/20/2018, 09:40 AM
© Reuters. FILE PHOTO: Woman walks past a "debt clock" screen, installed by Bruno Leoni Institute's analysts, displaying Italy's public debt at the Termini central station in Rome

By Virginia Furness

LONDON (Reuters) - Italian government bond yields jumped to one-month highs on Tuesday, 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.

Those rises were limited after senior euro zone officials downplayed the threat of immediate euro zone contagion, but sentiment remained bearish ahead of Wednesday's official response from the European Union on Italy's draft budget which is expected to see a negative response.

In addition to the broader risk aversion prompted by a sell-off in U.S. tech stocks, Italy's standoff with the European Union over its 2019 budget prompted Italy's 10-year bond yield to briefly hit a one-month high at 3.71 percent (IT10YT=RR), while Italian bank stocks fell to a two-year low (FTIT8300).

Investors appeared soothed later in the session however after European Central Bank policymaker Ewald Nowotny said Italy does not pose an immediate economic risk within the euro area.

Italy's five-year government bond yield was last up four basis points on the day at 2.87 percent, having hit highs of 2.98 percent (IT5YT=RR). Italy's 10-year government bond yield also fell back and the yield gap over safer German peers pulled back from one-month highs around 335 bps (DE10IT10=RR)

However, analysts warned that the buying did not reflect a complete turn around in sentiment towards Italy.

"At the margins it has helped but maybe there is some consolidation after the near 20 basis point widening in Italian bond spreads, the backdrop remains volatile," said Michael Leister, rates strategist at Commerzbank (DE:CBKG).

Italian bond yields initially jumped after Deputy Prime Minister Luigi Di Maio said that Italy was paying the consequences of the European stonewalling over the budget.

"The comment by Di Maio saying the EU is acting like a stonewall 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."

Budget concerns in Spain meanwhile pushed Spanish 10-year bond yields to one-month highs around 1.67 percent (ES10YT=RR).

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 in the face of Brexit uncertainty.

© Reuters. FILE PHOTO: Woman walks past a "debt clock" screen, installed by Bruno Leoni Institute's analysts, displaying Italy's public debt at the Termini central station in Rome

Germany's 10-year bond yield, the benchmark for the region, hit a more than three-week low at 0.346 percent (DE10YT=RR).

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