Italy Debt Risk Gauge Hits Two-Year High as ECB Tightening Eyed
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Loading... - Cornelia Aakster
- 06 May 2022
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The premium investors demand to hold Italian debt rose past two percentage points for the first time since May 2020 as investors braced for the European Central Bank to remove its stimulus programs in the face of accelerating inflation.
The spread between 10-year Italian yields and equivalent German rates, a closely-watched gauge of risk for the nation and the European bloc as a whole, rose one basis points to 201 basis points Friday, the highest in two years. The spread widened for a 13th consecutive session, its longest streak in data going back to 1993.
From April: ECB Is Crafting a Crisis Tool to Deploy If Bond Yields Jump
The ECB has signaled its asset purchases -- which have helped buoy the bonds of more indebted nations such as Italy -- will likely end in July. Traders are also betting on a swift series of interest-rate hikes starting in the second half of this year to end years of negative deposit rates in the region, feeding concerns that fragmentation could return to the 19-nation euro zone.
“European government bond spreads are already adjusting to this brave new world,” said Commerzbank strategists including Michael Leister, who expect the Italian yield premium to widen to 240bps in the second half of this year. “It is becoming increasingly clear that the bar for the ECB to apply flexibility to counter fragmentation is higher than many thought.”
Italian bonds have underperformed since the end of last year amid concerns that higher inflation will force the ECB to tighten financial conditions prematurely. Still, the spread has risen gradually in contrast to previous bouts of market stress, with the gap narrower than it was in the early months of the pandemic and far below levels seen during the sovereign debt crisis a decade ago.
The market is also bracing for more government bond supply after the ECB ended its pandemic-related purchases in March. Citigroup Inc. estimates that sales next month could rise to the highest since 2013 after accounting for coupons, redemptions and the central bank’s smaller asset purchase program.
“The impact of upcoming increase in net euro-area government bond supply is perhaps yet to reflect in spreads,” said Aman Bansal, fixed income strategist at Citi. Read More...
