European bond market hit by Italy’s plans for higher borrowing

Receive free sovereign bond updates

we will send you myFT Daily Digest Email summary of latest news sovereign bonds There is news every morning.

European government bond prices fell sharply on Thursday as investors spooked Italy’s larger-than-expected budget deficit and grew worried that central banks would keep interest rates high for a long time.

After Italian Prime Minister Meloni’s government raised its fiscal deficit target and lowered its growth forecast for this year and next, Italy’s 10-year government bond yield rose 0.18 percentage points to 4.95%, the highest level in ten years.

The sell-off spread to the British market, with the 10-year government bond yield rising 0.18 percentage points to 4.54%, the largest one-day rise since February. Investors say concerns that the Federal Reserve will keep interest rates higher “for longer” are increasingly spreading to European markets.

“A wall of worry is hitting the bond market, and the latest trigger is oil prices,” said Jim Leaviss, fund manager at M&G Investments. He added that the recent rise in oil prices, which hit a 10-month high on Thursday, had investors wondering “what if What should I do if the swelling is not dead yet?”

In the euro zone, prospects for higher Italian borrowing emerged after the French government was criticized by the country’s fiscal regulator on Wednesday for not cutting public spending sufficiently to avoid breaching EU fiscal rules next year.

The French 10-year government bond yield jumped to 3.54%, the highest level since 2011. The spread between Italian government bond yields and those on ultra-safe German bunds, a closely watched measure of market risk in the euro zone, reached its highest level since 2011. March U.S. banking crisis.

“The narrative that’s been replaced is the fiscal story,” said Mike Riddell, fixed income portfolio manager at Allianz Global Investors. “The budget deficit could be larger than previously thought. So bonds The vigilantes are indeed on the rise again – markets are not just intolerant of cyclical deficits, but structurally higher deficits.”

Concerns about increased borrowing put further pressure on bond markets, which are already in turmoil on worries about higher interest rates over the longer term. The yield on German 10-year government bonds – the euro zone benchmark – climbed to 2.97%, its highest level in more than a decade. Spain’s 10-year government bond yield rose above 4% for the first time since 2013.

Central banks have said that while they are coming to the end of a historic series of rate hikes, they expect borrowing costs to remain high for an extended period to ensure inflation falls to target before considering rate cuts.

In the United States, the 10-year Treasury yield climbed 0.03 percentage point to 4.66%, extending a pullback in U.S. bond prices that began last week after the Federal Reserve said last week it would cut interest rates much slower next year and in 2025 than investors expected. exist.

Piet Haines Christiansen, head of fixed income research at Danske Bank, said the bond market was “caught in a perfect storm.”

He added: “The sell-off was driven by a ‘longer move higher’ that caught mispositioned investors off guard, coupled with higher revisions to budget deficits in France and Italy and high inflation expectations due to rising oil prices.”

Italy’s Finance Ministry sold 3 billion euros of 10-year bonds on Thursday, reflecting soaring borrowing costs. The bonds yield 4.93%, the highest level since 2012, up from 4.24% for similar bonds last month.

Italy’s government late on Wednesday forecast a fiscal deficit of 5.3% of gross domestic product this year, up from the 4.5% target set in April, citing the cost of a controversial housing improvement tax credit program. Soaring.

Rome raised its deficit target for next year to 4.3% of GDP from its earlier target of 3.7%, saying that would allow it to fund its top policy priorities, including helping low-income families and incentivizing Italians to have more babies.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said: “The upward trend in Italy’s deficit forecast is a clear catalyst for the current widening of interest rate spreads, which will translate into an increase in the supply of bonds absorbed by the market.”

The surge in oil prices has heightened concerns about continued inflation and tightening monetary policy. Brent crude hit a 10-month high above $97 a barrel early Thursday before retreating.