Italy-Germany Yield Spread Widens by the Most in Seven Months

  • Investor concern over bad-bank plan progress weighs on Italy
  • Risks remain that ECB might disappoint markets: Danske

The yield difference between government bonds from Italy and Germany widened by the most since July this week as market turmoil promps investors to opt for the relative safety of German bonds, while worries in Italy weighed on the debt there.

German bunds were also supported by prospects of more aggressive easing measures by the European Central Bank as it struggles to increase inflation closer to its 2 percent goal. ECB President Mario Draghi had signaled recently that the institution is ready to expand an already unprecedented monetary stimulus program as soon as March. Italian bonds were held back by worries about the nation’s banks as they try to offload their bad debt and clean up their balance sheets.

“You have this situation of global uncertainty, where people are worried about the economic outlook,” said Jens Peter Soerensen, chief analyst at Danske Bank A/S in Copenhagen. “Locally in Italy you had this bad bank deal which people don’t really think will solve the problem of the banking sector, so that’s adding pressure on Italian bonds.”

Italian 10-year bond yields climbed 15 basis points this week, or 0.15 percentage point, to 1.56 percent, at 4:42 p.m London time. The 2 percent security due in December 2025 fell 1.36, or 13.60 euros per 1,000-euro ($1,114) face amount, to 104.04.

Wider Spread

That left the yield difference, or spread, with German bunds 17 basis points wider at 126 basis points, the biggest weekly jump since since July.
The yield on German 10-year bonds fell two basis points in the week to 0.30 percent and touched 0.26 percent, the lowest since April. The nation’s two-year note yield was minus 0.49 percent, after falling to a record-low minus 0.502 percent on Feb 3.

Expectations of more stimulus from the ECB have pushed the amount of government debt yielding below zero percent to more than $2.5 trillion, equating to almost 40 percent of the Bloomberg Eurozone Sovereign Bond Index. Even so, some in the market remain wary of their experience in December, when Draghi delivered a program that was perceived to be less aggressive than what markets had expected, and bond prices tumbled.

Soerensen said investors were now cautious that the ECB might fail to meet expectations of further easing and this could cause the spread to narrow. “People are wondering what else the ECB can come up with.”

Forward contracts based on the euro overnight index average, or Eonia, are fully pricing in a 10 basis-point cut to the ECB’s deposit rate at the central bank’s March meeting, data compiled by Bloomberg show.

Europe’s benchmark sovereign securities advanced for a third week as a U.S. Labor Department report showed payrolls increased less in January than economists forecast.

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