Italian bonds sell off sharply on ECB policy tightening fears

Content of the article

Yields on Italian government bonds jumped on Monday after the European Central Bank last week opened the door to speculation of monetary tightening in March.

Peripheral bond prices underperformed their peers as faster-than-expected monetary tightening would hurt more bonds from most indebted countries.

“Investors are focused on net supply which will be higher in 2022 after the ECB’s hawkish shift, and will need to be absorbed by the private sector,” said Fabio Castaldi, chief investment officer at Pictet Asset Management.

Advertising

Content of the article

“Such a scenario will increase the risk premium mainly for highly indebted countries.”

The yield on Italian 10-year government bonds rose 11.5 basis points to 1.831%, hitting a new high since May 2020.

Yields on shorter maturities jumped around 13 basis points, with the 5-year rising above 1% for the first time since June 2020.

The closely watched spread between German and Italian 10-year yields stood at 161 basis points, its widest since August 2020.

Spanish and Portuguese 10-year borrowing costs rose about 8 basis points.

Five-year credit default swaps (CDS) for Southern European countries – an insurance measure of their debt exposure – rose, with Italian CDS gaining 4 basis points (bps) from to nearly 100bps from Friday, levels last seen in January 2021.

Advertising

Content of the article

Money markets are currently pricing in an 80% chance of a rate hike in June and a rate hike of more than 50 basis points by December 2022.

The yield on Germany’s 10-year government bonds, the euro zone’s benchmark, rose 2.5 basis points to 0.23%, its highest level since January 2019.

The 5-year rate was in positive territory at 0.032%, up 3 bps. The 2-year rate reached a new high since September 2015 at -0.21%.

Some investors expect ECB President Christine Lagarde to try to assuage rate hike jitters during her testimony to the European Parliament at 1545 GMT.

“Following the hawkish spin from the Feb. 3 press conference, the focus will be on whether there is a dovish pushback,” Citi analysts said in a note, mentioning Lagarde and a speech. from the ECB’s chief economist, Philip Lane, due on Thursday.

Advertising

Content of the article

The ECB could end its stimulus program sooner than expected, but it is unlikely to raise its primary interest rate in July as investors expect, the ECB’s policy chief told Reuters. , Martins Kazaks.

“I expect the ECB to reiterate its statements and successively prepare the market for a class-leading rise in the fourth quarter of 2022 or the first quarter of 2023,” Berenberg analysts said in a note to clients.

Lagarde could “reassure that the exit process will follow the sequence and will in all likelihood be gradual, which could argue for some near-term stabilization,” Commerzbank analysts said in a note.

(Reporting by Stefano Rebaudo, additional reporting by Karin Strohecker and Sujata Rao; editing by Mark Heinrich)

Advertising

comments

Postmedia is committed to maintaining a lively yet civil discussion forum and encourages all readers to share their views on our articles. Comments can take up to an hour to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We have enabled email notifications. You will now receive an email if you receive a reply to your comment, if there is an update to a comment thread you follow, or if a user follows you comments. See our Community Guidelines for more information and details on how to adjust your email settings.

About Janet Young

Check Also

Cushman & Wakefield veteran returns to business after short stint at Blackstone Company

Miami Broker Marc Gilbert spent two dozen years at Cushman & Wakefield before taking the …