Borrowing costs

Italy issues bonds with highest borrowing costs since wake of eurozone debt crisis

Italy has paid the highest borrowing costs on its debt since in the wake of the euro zone debt crisis, after the European Central Bank’s decision to withdraw stimulus triggered a sell-off on the bloc’s bond markets.

The Italian government sold 6 billion euros worth of medium- and long-term bonds at an auction on Thursday at the highest yields in nearly a decade.

Scorching inflation, further stoked by Russia’s invasion of Ukraine and its exacerbating pressures on the supply chain, prompted major central banks, including the ECB, to end accommodative monetary policy. Eurozone consumer price growth hit a record 8.1% last month.

ECB President Christine Lagarde said earlier in June that the bank would act in a “determined and sustained manner” to combat rapidly rising prices – with plans to withdraw a massive bond-buying program at pandemic era and to raise interest rates next month for the first time. times since 2011.

This anticipated reversal of ultra-loose policy has, in turn, triggered turbulence in eurozone bond markets, dealing a particular blow to the region’s most indebted economies. Falling bond prices drove up yields in the secondary market. These higher yields also increase the borrowing costs that countries pay when they issue new debt.

Italy auctioned 2 billion euros in 10-year bonds and 4 billion euros in five-year bonds on Thursday, at yields of 3.47 and 2.74 percent respectively. It last sold 10- and five-year bonds at higher yields in 2014 and 2013 respectively.

Yields on the country’s public debt, which move inversely to their prices, remain well below the levels reached at the height of the European sovereign debt crisis. But they have been on the rise since the beginning of the year. Last month, Italy sold 10-year bonds at a yield of 3.1%.

ECB officials have sought to allay concerns about the so-called risk of fragmentation, where rising interest rates are widening the gap in borrowing costs between the bloc’s strongest and weakest economies, leaving this latest cohort in a more vulnerable position.

The bank’s board has pledged to create a “new anti-fragmentation instrument” to allay these concerns.

But Bas van Geffen, senior macroeconomic strategist at Rabobank, said the ECB faces “a difficult, if not impossible, balancing act” as it must ensure the tool “effectively avoids the risk of fragmentation, ‘it does not interfere with the inflation mandate’. , and that it is politically acceptable.

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