Italian bond yields jump as stage set for showdown with EU

Italian bond yields hit three-week highs on Wednesday, widening the gap over top-rated German peers, after Italy re-submitted its 2019 budget to the European Commission with unchanged growth and budget deficit assumptions but falling debt targets.

Meanwhile yields on higher-rated bonds in the euro zone fell on that news as well as a slide in oil prices and data showing that Germany’s economy shrank in the third quarter for the first time since 2015.

But it was the details of Italy’s new draft budget that gripped bond investors.

The falling debt forecast in the revised budget, which Italy wants to achieve by using funds from privatisation equal to 1 per cent of gross domestic product, is to address one of the commission’s main concerns about the previous draft - that public debt would not fall as required by EU rules.

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But the budget still plans to increase the structural deficit, which excludes one-offs and cyclical swings, by 0.8 per cent of GDP next year, rather than cut it by 0.6 per cent of GDP as required under EU rules.

This, along with what Brussels sees as unrealistically high assumptions on growth, still puts Rome on a collision course with the Commission, which is to give an opinion on the revised draft on November 21st.

Weak spot

Italian bond yields rose as much as 9 basis points on the day across maturities at one stage, marking Italy out once again as the weak spot in European fixed-income markets.

“I’m not surprised the market is trading this way and we need to see more signs of a compromise on the budget before we get relief for Italian markets,” said Commerzbank rates strategist Rainer Guntermann.

Yields fell slightly from the day’s highs as the session wore on and were about 5-6 bps higher towards the close.

Italy’s 10-year bond yield hit a three-week high at around 3.55 per cent, before settling at 3.50 per cent by the close, pushing the gap over benchmark 10-year German bund yields to 309 bps from around 303 late on Tuesday. – Reuters