Italy’s bonds rocked by UK referendum

Italy’s bond markets were rocked by the Brexit vote amid reports Rome is considering injecting capital into some lenders battered by a fresh selloff.

The yield on the Italian 10-year bond rose to 1.52% yesterday, up from 1.40% before the UK referendum vote last week, as the country’s bonds underperformed its eurozone peers.

In contrast, the implied cost of borrowing for Ireland on debt markets for 10-years has remained little changed at 0.77%, while the so-called flight to safety meant investors are theoretically paying money to lend money to the German government, with the bund 10-year yield trading yesterday at minus 0.10%.

Amid concerns about the potential rise of an anti-EU political group and the country’s financial system, “a lot is going on in Italy”, said Ryan McGrath, a senior trader at Cantor Fitzgerald Ireland.

The Italian government is weighing measures that may add as much as €40bn.

Italy’s government is seeking to stabilise a financial system, hurt by €360bn of non-performing loans, sluggish economic growth and record-low interest rates after an earlier attempt to set up a bad bank with public funds met with resistance from the EU. 

The country was among the hardest hit by the global stockmarket rout, with some of Italy’s largest banks dropping more than 20%.

“The Italian banking sector’s worries are far from resolved,” said Jan von Gerich, a strategist at Nordea Bank in Helsinki. 

“The outlook for Italian banks was clouded even before Brexit and the new worries Brexit has created for the banking sector in general further darken the outlook,” he said. 

Lenders extended declines yesterday, with UniCredit, Italy’s biggest bank, down 7.5%, and Intesa Sanpaolo dropping 8.8%.

The injection could be financed through government debt issuance, Il Fatto Quotidiano reported. 

Governments are able to provide funds directly to banks under exceptional circumstances of systemic stress such as sparked by Brexit, without breaching state-aid rules.

“Tactically this is the time to push EU partners to approve their plans, which would otherwise probably meet with many objections,” said Marc Ostwald, a strategist at ADM Investor Services International in London.

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