Italian risk premium rises to biggest weekly spike

Eurozone bond yields rose on Friday, a day after the ECB announced it was ending its long-term bond buying program and raising rates from July.

Southern European bonds remained under pressure as the ECB made no new commitments to counter the fragmentation of the bloc’s debt markets.

On Friday, Italy’s 10-year bond yield rose to its highest level since 2018 at 3.78% in early trading, slightly below the highest level since 2014.

The yield spread on German 10-year bonds, effectively the risk premium on Italian debt, widened to 231 basis points on Friday, approaching its highest level since the peak of the COVID-19 pandemic in 2020.

That premium is up 24 basis points this week, the biggest weekly jump since April 2020, with most of the growth occurring on the Thursday after the ECB decision.

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“As more color (details) about the ECB discussions emerges, most of it does not sound encouraging for the periphery,” said Christoph Rieger, head of credit research at Commerzbank, referring to a Reuters article after the meeting that reported, that there was no debate about the announcement of a new anti-fragmentation tool.

“The bearish spread widening in the periphery underscores how nervous European government bonds are about the looming tightening and a potentially asymmetric transmission of rate hikes, which could cause problems for the periphery,” he said.

Elsewhere, the yield on German 10-year bonds, the benchmark for the eurozone, fell nearly 2 basis points to 1.42%, below the highest level since 2014, to which it rose on Thursday at 1.47%.

Markets continue to target a 75 basis point ECB rate hike by September after the ECB said a 25 basis point rate hike next month could be followed by a larger hike in September, depending on inflation.

Despite this, they have increased their bets on the final rate and they are now up to around 2%, compared to around 1.8% before the ECB policy decision.

Investors will be keeping an eye out for speeches by German central bank governor Joachim Nagel, Austrian Robert Holtzmann and Frenchman Francois Villeroy de Gallo on Friday for more details on the ECB’s intentions.

The focus will also be on US inflation data, which should be released soon.