Italy's Yield Reaches Two-Month High as ECB's Impact Seen Waning

Updated on
  • Central banks `close to endgame' on stimulus: Rabo's McGuire
  • German investor confidence unexpectedly declines in April

The European Central Bank’s ability to prop up the region’s lower-rated debt may be diminishing: Italy’s 10-year bond yield climbed to the highest in two months on Monday, just days after officials said their stimulus policies are working.

Italian government bonds fell, with the 10-year yield premium over benchmark German securities reaching the largest in two weeks, even as the ECB buys 80 billion euros ($90 billion) a month of the euro region’s debt. For much of last year, the quantitative-easing program helped Italian bonds outperform their peers from the continent’s richer nations as investors sought out higher yields.

Last week, ECB policy makers kept interest rates unchanged and President Mario Draghi said that while the stimulus measures were working, they still needed more time to revive growth and inflation. Data Monday showed German business confidence unexpectedly deteriorated this month, the latest sign that Europe’s largest economy is losing momentum.

“In terms of what central banks can do, we are close to the endgame here, where it is clear that more stimulus does more harm than good,” said Richard McGuire, head of rates strategy at Rabobank International in London. “Lower policy rates are now possibly resulting in lower confidence. There is something seemingly weighing on peripheral debt. Either way it certainly merits a very cautious approach to trading peripheral spreads.”

Periphery Vs Core

Italy’s 10-year bond yield climbed six basis points, or 0.06 percentage point, to 1.54 percent as of 4:10 pm. London time, and earlier reached 1.55 percent, the highest since Feb. 24. The 2 percent security due in December 2025 fell 0.58, or 5.80 euros per 1,000-euro face amount, to 104.16.

The yield on Germany’s 10-year bund increased three basis points to 0.26 percent, with the yield gap between the two nations’ securities widening to as much as 1.29 percentage points, the most since April 8.

Italian debt has returned 1.2 percent this year, the worst in the euro area after loss-making Portuguese securities, according to Bloomberg World Bond Indexes.

The ECB’s efforts to bolster growth in the euro zone include an unprecedented asset-buying plan that’s set to run until at least March 2017 and which was expanded last month. Stimulus sparked a rush for Italian bonds in recent years, with the 10-year yield falling from as high as 7.48 percent in 2011. It reached a record-low 1.031 percent in March 2015.

Bad Medicine

Until this year, Italian debt had outperformed Germany’s every year since 2011. And then came a selloff in stock markets and commodities around the world, spurred by China’s slowdown and concern that the efficacy of global central-bank policy was waning. The result was a surge in demand for bonds and other assets seen by investors as havens -- such as German and even French securities.

Rabobank’s McGuire recommends selling Spanish bonds against French securities.

“Eight years of listening to this policy promise of where asset valuations go, fundamentals follow, investors now realize risky assets are not fundamentally justified, but more than that, they will never be fundamentally justified,” McGuire said. “Stimulus is self-defeating.”