LONDON: The gap between Italian and German bond yields was at its widest in just over five years on Thursday, as Italian government bonds came under renewed selling pressure.
Italy’s two, five and 10-year bond yields rose to reach near three-month highs, with non-core euro zone bond markets also coming under pressure.
Analysts cited a pick up in risk aversion in general as well as some concern ahead of a key Italy ratings review on Friday for the late selloff in Italian debt.
Earlier in the session, Italy sold 7.75 billion euros of new bonds in auctions that met with decent demand.
But the renewed selloff in Italian debt came on another volatile day for bond traders.
Italy’s two, five and 10-year bond yields hit near three-month highs at 1.43 percent, 2.56 percent and 3.24 percent respectively. .
That pushed the gap between Italian and German 10-year bond yields to 288 bps – the widest since July 2013.
“(The move) certainly fits the general risk-off tone,” said Richard McGuire, head of rates strategy at Rabobank. “Treasuries, Bunds and Gilts are all bid this afternoon and stocks are suffering against a backdrop of emerging market concerns.”
McGuire added that the sell-off in Italian bonds could have been exacerbated by “trepidation ahead of a ratings review tomorrow,” though he pointed to the widening in other peripheral bonds as evidence that the move was not idiosyncratic to Italy.
Greek bond yields were also up by as much as 16 bps with the yield on Greek five-year bonds reaching a two-month high at 3.42 percent.
German 10-year bond yields, the benchmark for the region, were down five bps to 0.36 percent, after reaching highs of 0.4 percent earlier in the session. In keeping with the broader flight to quality, European stocks were down 0.25 percent.
One Italian government bond trader told Reuters that speculation about a downgrade of Italy’s sovereign rating could explain Italy’s underperformance.
Analysts do not expect Fitch to downgrade Italy’s rating on Friday although concerns about increased spending from the new anti-establishment government have raised concerns about Italy’s ratings outlook.
Analysts said Thursday’s auction result did not mean a complete turnaround in attitudes towards Italy.
“While spreads could see some short term relief and stability as a result, this does not imply a turn in sentiment towards Italy,” said Mohammed Kazmi, portfolio manager at UBP in an email.
“Instead, investors will now quickly switch their focus onto tomorrow’s Fitch rating review and the upcoming budget negotiations which could lead to further BTP volatility.”
Source: Brecorder
