Italian government-bond yields rose to new highs on Tuesday after Economy Minister Giovanni Tria’s address to parliament on the government’s budget plans did little to reassure nervous investors.
Mr. Tria called for a constructive discussion with Brussels over the budget and said he did not think Italy’s deficit forecasts were so shocking. The EU Commission Vice-President Jyrki Katainen said Italy’s situation is very vulnerable, and negotiations may prove very difficult.
As a war of war of words between Rome and the European Union over Italy’s spending plans has ratcheted up in recent days, Italian bonds, stocks and the euro have taken a fresh hit.
“Maybe some people were expecting some reassurance from Tria, but he’s not calling the shots,” said Jan von Gerich, chief analyst at Nordea. “The general background is that the budget continues to cause uncertainty.”
Italy’s 30-year bond yield rose above 4 per cent for the first time since August, 2014, and was last up five basis points on the day.
Five-year Italian bond yields rose to 3.13 per cent, their highest level in almost five years, while 10-year bond yields jumped over 10 basis points to a new 4½ year high at 3.71 per cent.
This pushed the premium investors demand for holding Italian 10-year bonds over top-rated Germany to its widest point in five years at around 312 basis points.
Analysts said talk of a report that the European Commission was likely to reject Italian budget plans was putting pressure on Italian bonds.
The European Commission is not due to express a first opinion on the Italian budget until November.
It has told Italy it is concerned about the budget deficit plans for the next three years since they breach what the EU asked Rome to do in July.
“Instability and uncertainty is here to stay,” said one Milan-based rates strategist who asked not to be named.
“There is a power struggle between the government, EU institutions and financial markets and we are nowhere near the end of the confrontation.”
Italy’s bond market had shown some signs of stabilizing early on Tuesday on hopes that Mr. Tria would strike a more conciliatory tone in parliament.
The euro has also taken a hit from concerns about tension between the EU and Italy, languishing near a seven-week low.
“At the moment, investors are puzzled because it is so uncertain where this is going to end, that spread could really go anywhere,” said a senior banker at one of Italy’s primary dealers – banks appointed by governments to buy bonds at government auctions. He preferred to remain unnamed as he is not authorized to speak about his clients.
Spanish and Portuguese bond yields rose to their highest levels since May and June respectively, but those markets have not seen heavy selling – suggesting that contagion from Italy remains limited.
In fact, most bond yields in the bloc were a touch higher – feeling the pull of a rise in U.S. Treasury yields to fresh multiyear highs on Tuesday.
U.S. Treasury yields have been rising on the back of a strengthening economy and on expectations the Federal Reserve will continue to hike rates as a result.
German and French 10-year yields rose one to two basis points each at 0.55 per cent and 0.90 per cent respectively.