Italy’s Bond Spread Widens Before Results of Banks’ Stress Tests

  • Premium Italy pays over Germany reaches highest in two weeks
  • Results of EBA’s stress-test on euro-area banks are due Friday

The extra yield investors demand to buy Italy’s 10-year bonds instead of benchmark German debt held at the biggest level in more than two weeks, highlighting concern that some of the nation’s banks may fail to display a clean bill of health when stress-test results are released Friday.

The spread casts the spotlight on the country’s banking troubles before the industry’s latest health check, an issue that weighs on the nation’s sovereign bonds. The gap climbed to as high as 1.305 percentage point on Thursday, the most since June 12 on a closing basis.

The European Banking Authority’s stress-test results on the 51 largest euro-area banks are due Friday at 9 p.m. London time. Should they suggest the need for new capital at Italian banks, investors speculate that the question of the nation’s financial and political stability will be raised.

“Stress tests are important as they would highlight an immediate need for capital injection and as yet there is no comprehensive plan” to address the problem in the Italian banking sector, said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “Investors are slightly worried and peripheral bond performance is reflecting this.”

10-Year Yield

The yield on Italy’s 10-year bond was little changed at 1.20 percent as of 4:26 p.m. London time. The price of the 1.6 percent security due in June 2026 was at 103.715 percent of face value. This left the spread over similar maturity German bund yields at 1.29 percentage points, which matches the highest closing price in more than two weeks.

Britain’s June 23 vote to leave the European Union exacerbated the selloff in Italian banking shares and further restrained the nation’s bonds, which have been beset by a growing political risk. Prime Minister Matteo Renzi is facing a referendum later this year, having said he would resign if voters rejected his overhaul of the political system.

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