Italian bond yields rise sharply as Draghi government teeters

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LONDON — Italy’s borrowing costs rose sharply on Monday and demand from premium investors to hold Italian debt against safer German peers was at its highest level in a month as Italian political unrest rumbled .

Prime Minister Mario Draghi tried to resign from his post on Thursday after the coalition partner 5 Star Movement failed to back him in a confidence vote. Draghi’s resignation was rejected by the Italian president.

A source in the prime minister’s office said Draghi would not bow to any « ultimatum » from other parties and was determined to step down from his post.

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The yield on Italian 10-year bonds rose 10 basis points (bps) to 3.48% in early trading, pushing the closely watched spread over German Bund yields to its all-time high in addition to a month at around 235 bps.

Two-year yields rose nearly 4 basis points to 1.36%.

Eurozone bond yields were higher overall, but it was the move in Italy that stood out. German 10-year bond yields rose 6 basis points after hitting seven-week lows on Friday.

Draghi is expected to address parliament on Wednesday.

“We expect volatility to remain high until then in response to various rumors regarding whether he will stand firm on his resignation or is prepared to stay in place,” UniCredit analysts said in a note. .

« Any indications that might increase the likelihood of a snap election will ultimately be negative for BTPs and lead to wider spread. »

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ECB RATE INCREASE

Political instability in Italy comes in a week when the European Central Bank (ECB) is expected to raise interest rates for the first time in 11 years and announce details of a new anti-fragmentation tool to contain tensions on the bond markets.

The ECB has already announced a 25 basis point rate hike on Thursday and money market prices have about a 35% chance of an outsized 50 basis point move, up from about 40% on Friday, according to Refinitiv data. .

Markets are pricing in 160 basis points of tightening by the end of the year, implying that a hike of at least 50 basis points could come at one or more of the next four ECB meetings .

Given growing concerns about the economic outlook, the window of opportunity for the ECB to raise rates may soon close, analysts said.

« The window is closing quickly, and I think that’s what we’re seeing in terms of market prices, » said Tatjana Greil-Castro, co-head of public markets and portfolio manager at Muzinich & Co.

« We’re having a hard time seeing what’s going to happen in September – so much can happen between now and then right now. »

The Eurozone is grappling with an energy shock that has heightened the risks of recession. (Reporting by Samuel Indyk; additional reporting by Dhara Ranasinghe; editing by Dhara Ranasinghe and Gareth Jones)