Borrowing costs

Italian long-term borrowing costs stuck near eight-year highs

Italy’s long-term borrowing costs remained stuck near the highest level since 2014 at an auction on Thursday in the latest sign of how investors are grappling with political unrest and elections imminent in Rome.

The country issued 2 billion euros of 10-year debt at a yield of 3.46%, down 0.01 percentage points from the previous auction on June 30, according to the Italian office. public debt. It also sold 2.75 billion euros of five-year debt at a yield of 2.82% – the highest cost of borrowing since the wake of the eurozone debt crisis in 2013.

The figures contrast with Germany, the region’s benchmark borrower, which has seen the borrowing costs it paid when selling new debt fall in recent weeks. Berlin sold 10-year Bunds at a yield of 0.94% on Wednesday, down from 1.22% at an auction in early July.

The widening of the chasm shows how investors are demanding more compensation for the risk of holding Italian bonds after Prime Minister Mario Draghi resigned earlier this month. It also means rising yields in secondary markets where bond trading seeps into Rome’s public finances.

Even before Draghi’s resignation, Italy was grappling with soaring food and fuel prices fueled by Russia’s war in Ukraine and the end of a decade of ultra-loose monetary policy and purchasing. of bonds by the European Central Bank. Last week, the ECB strayed further from its accommodative policy by raising interest rates for the first time in more than a decade.

Analysts fear that a government less committed to Draghi’s economic reform agenda could come to power after Italy’s September 25 elections. Less fiscal discipline and an ambitious program to boost the country’s competitiveness and long-term growth prospects could jeopardize Rome’s access to 200 billion euros in EU funding from the Covid-19 recovery program of the block, they say.

“We see several headwinds for [Italian government bonds]said Simon Freycenet, an analyst at Goldman Sachs.

Goldman said this week it expects the difference between Italian and German 10-year yields to widen to 2.5 percentage points by the end of the year from around 2.3 points currently due to “the combined effect of growing political uncertainty and a potential loss of political continuity”. at a critical moment”. The Wall Street bank previously forecast a year-end gap of 2 percentage points.

The ECB last week unveiled a bond-buying tool to “counter unwarranted market dynamics” that threaten eurozone stability. Policymakers fear the unwinding of its stimulus programs will have an outsized effect on the borrowing costs of countries like Italy, Spain and Portugal.

But the ECB is unlikely to use its new measures to address self-inflicted problems caused by political volatility, analysts said. “To begin with, they don’t want to use the tool at all. A political crisis is the exact opposite of circumstances where they want to use it,” said Antoine Bouvet, senior rates strategist at ING.

Peter Schaffrik, global macro strategist at RBC Capital Markets, said the ECB was more likely to use its new tool if jitters over Italian debt spread to bonds from other indebted eurozone nations.

“If the [Italian-German] the gap is over 2.5 percentage points and others are rock solid, the ECB would say it’s an Italian problem,” he said. “If it starts to impact everyone. . . they would say we have a fragmentation problem.