German 10-year yields touched an eight-month low amid speculation spending cuts included in a US debt-limit compromise agreement will harm the global economy. Investors pared bets on higher euro-region borrowing costs as European producer-price inflation slowed for a second month.
“This has all the features of a self-fulfilling crisis,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland in London. “The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.”
The yield on 10-year Italian bonds rose 13 basis points to 6.14% at 4.31pm in London. It earlier surged to 6.25%, the most since November 1997. The 4.75% security maturity in September 2021 fell 0.895, or €8.95 per €1,000 ($1,422) face amount, to 90.34. That pushed the difference in yield, or spread, over bunds, to as much as 384 basis points, the most since before the euro was introduced in 1999.
Italian bond futures fell, sending the price difference over bund futures to a record. The September Italian futures contract fell 1% to 98.21 after reaching a record 96.75, making the difference over its German equivalent 33.52.
“Suddenly, Italy joined the other peripherals,” said Justin Knight, a European rate strategist at UBS in London. “Investors are, in general, overweight Italy versus other peripheral markets, and it’s going to be a difficult position to unwind.”
However, after an emergency meeting last night senior Italian financial officials said the country’s financial system remains stable despite market tensions created by international uncertainties.
Finance Minister Giulio Tremonti led a meeting of Italy’s stability committee and determined that the recent turmoil on Italian financial markets reflects “international uncertainty.”
“Analysis has shown that despite the efforts to progressively reduce the budget deficit, there are tensions in Italian markets deriving from international uncertainty,” the committee said.
Tremonti met with Bank of Italy director general Fabrizio Saccomanni and Giuseppe Vegas, chairman of Consob, Italy’s financial- markets regulator.
The so-called Financial Stability Committee met to discuss the market turmoil which has sent Italian bond yields soaring to record levels and hit bank stocks and to take stock of recent analysis by financial supervisory authorities.
“The analysis shows despite the steady reduction of the public deficit, tensions deriving from international uncertainty are showing through on Italy,” it said.
“The analysis confirms that the Italian banking and financial system is solid, thanks to quick action to reinforce capital conditions and bank liquidity,” it said.
Economy Minister Giulio Tremonti called the meeting of top officials from the central bank, the economy ministry, market regulator Consob and insurance authority ISVAP, after market turmoil which has seen Italian bond yields rise sharply and share prices dive.
The yield spread on Italian 10-year BTP bonds against German Bunds hit a euro-era high of 385 points yesterday, with yields on Italy’s 10-year bonds climbing above 6%, a level generally seen as unsustainable in the long term.
German bonds outperformed all their euro-area peers, including France and the Netherlands, with the exception of Irish securities. The French-German spread widened for a fourth straight day to 76 basis points.