Italy’s Bonds Fall With Its Banking Crisis Back in the Spotlight

  • Italian-German 10-year yield spread widens for a second day
  • Nation considers capital injection for struggling Monte Paschi

Italy’s bonds fell for a second day as the crisis in the nation’s banking sector deepened, with regulators pressing lenders to raise capital and clean up their balance sheets.

Yields on the nation’s 10-year government securities rose, having reached their lowest in more than a year last week. Italy is considering injecting fresh capital into Banca Monte dei Paschi di Siena SpA to boost the finances of its third-biggest lender before stress-test results, a person with knowledge of the plan said.

Britain’s June 23 vote to leave the European Union exacerbated the selloff in Italian banking shares and further weighed on the nation’s bonds, which have been plagued by a weak economic outlook and growing political risk.

“Italian banks were quite badly beaten up,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “There’s going to be a renewed focus on them over the next few months.”

Italian Prime Minister Matteo Renzi has called a referendum for later this year on overhauling the political system. If he loses, he’s promised to quit. The extra yield, or spread, that investors receive for holding Italy’s 10-year bonds instead of benchmark German debt widened for a second day.

Brexit Driver

Italy’s banking woes and the Brexit vote are the two main drivers of “all risk assets in Europe, and potentially globally,” Callan said.

The yield on Italy’s 10-year bond rose two basis points, or 0.02 percentage point, to 1.27 percent as of 1:49 p.m. London time, having reached 1.15 percent on Friday, the lowest since March 2015. The 1.6 percent security due June 2026 fell 0.23, or 2.30 euros per 1,000-euro ($1,115) face amount, to 103.085.

The spread over similar-maturity German bund yields widened five basis points to 1.43 percentage points. The premium reached a one-year high of 1.92 percentage points on June 24, when the results of the U.K.’s referendum were known.

Spain’s 10-year bonds fell, with the yield climbing four basis points to 1.19 percent. The securities posted their performance since 2012 last week amid speculation they’d be among the main beneficiaries of any European Central Bank plan to loosen its rules on quantitative easing.

The nation’s two- and 10-year yields both touched record lows Friday -- also helped by acting Prime Minister Mariano Rajoy consolidating his position in the nation’s elections.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE