The Italian bond sale signals growing concern about the European Central Bank’s support for riskier debt

A key gauge of risks associated with owning Italian bonds rose on Monday to their highest in a year, a rally fueled by questions about the strength of the European Central Bank’s support for riskier government debt.

Eurozone bonds have been swept up in global debt selling over the past week as traders are betting that inflation will continue to rise. Forcing the European Central Bank to raise interest rates from record lows as soon as next year.

The intensification of sales In the wake of the European Central Bank meeting last Thursday, Christine Lagarde, the head of the central bank, insisted that raising interest rates in 2022 is not in line with his guidance. The pressure was particularly intense on bonds issued by countries in the debt-laden “periphery” of the eurozone.

The extra yield, or the spread that investors demand to buy Italian 10-year debt in place of the ultra-safe German equivalent — long considered a barometer of eurozone risk — widened to its highest level since October 2020 at 1.37 percentage points, up from less than 1 percentage point. In late September.

Analysts said Lagarde’s confirmation last week that the European Central Bank’s 1.85 trillion euro pandemic-era bond-purchase program – known as PEPP – would expire in March, led to more confidence in Italian debt. Spain, Portugal and Greece have also seen widening spreads compared to Germany in recent days.

Some analysts said a public holiday in several European countries, including Italy, may have contributed to calm trading conditions that exacerbated Monday’s market moves.

‘With the market now facing the future when [the PEPP] “Monetary easing is slowing down and less likely, so perhaps it is natural to ask how much support they can expect from the ECB going forward,” said Chris Atfield, European interest rate strategist. “This widening step may have a way to run.”

With its often unstable policies and borrowings of more than 150 per cent of GDP, Italy has in the past been a pressure point for investor concerns about debt sustainability in the eurozone.

After a brief rise in borrowing costs during the early stages of the pandemic, bonds issued by the eurozone’s third-largest economy have been among the biggest beneficiaries of European Central Bank support during the pandemic. Despite the recent rise, 10-year margins are still well below 2.8 percentage points and more during March last year, not to mention the levels of more than 5 percentage points reached at the height of the eurozone debt crisis a decade ago. .

Some investors say the central bank is likely to step in if the current selling accelerates. Under the green plan, it has the flexibility to ramp up purchases to prevent a “tightening of financing terms,” ​​a feature that some fund managers say will be preserved through an enhanced version of regular asset purchases due to the replacement of the existing program after March.

“For the ECB, Italian spreads are likely to be the main indicator of financing conditions,” said Mohamed Kazemi, portfolio manager at Union Bancaire Privée. “If we were to get a more robust expansion from here, we would imagine the ECB would come in and buy.”

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