Italian government bond yields hit their highest level in over a year on Friday before a key ratings review from Standard & Poor’s, amid a further sell-off in euro zone debt.
Italy is in focus ahead of a constitutional referendum on Dec. 4 on which Prime Minister Matteo Renzi has staked his political future.
With Republican Donald Trump’s shock victory in the US presidential election this week underscoring the rise of anti-establishment sentiment, investors fear the referendum could move the populist 5-Star Movement closer to power.
Against this backdrop, Italy’s borrowing costs jumped to their highest in more than a year at an auction on Friday.
Italy, which has one of the world’s largest public debt pile, sold 6.9 billion euros ($7.5 billion) over four bonds, drawing demand for 1.5 times that amount but failing to meet the top of its planned issue range of 7.25 billion euros.
Commerzbank analysts raised in a note the possibility of a “Black Friday” for Italian bonds — and though they saw this as unlikely, they recommended investors purchase low-risk German government debt instead.
“The auctions will take place ahead of S&P’s very important review, which may make them trickier than what is already to be expected in such a challenging market environment,” they said.
Standard & Poor’s is set to review its BBB- rating on Italy today, and though analysts do not expect a downgrade, the “stable” outlook could be at risk because of political risk and an ailing banking system.
Italy’s benchmark 10-year yield rose as much as 11 basis points to 1.95 percent, its highest level since September 2015. It retreated to 1.90 percent by 1150 GMT, still up 7 bps on the day.
Friday’s move came in tandem with a broad sell-off across the euro zone, with most yields up 3-8 bps at multi-month highs.
The fear that voters will reject the political mainstream is not confined to Italy, with French bonds among the day’s bigger losers on the possibility that far-right leader Marine Le Pen will mount a stronger bid for the presidency next year thanks to Trump’s triumph in the US.
France’s 10-year bond yields rose 2.3 bps to 0.71 percent — 20 bps higher than at the start of the week.
“France seemed to fare particularly poorly in this environment as concerns were voiced in the press about the risk of seeing Le Pen becoming president at next spring’s presidential elections,” said Mizuho strategist Antoine Bouvet.
Mizuho believes Trump’s election has compounded global economic uncertainty, including over the European Central Bank’s next moves on interest rates and asset purchases.
Investors are starting to price in a slim chance the ECB will raise borrowing costs next year for the first time since 2011, with bets reinforced by signs that inflation expectations are rising.
The euro zone’s long-term inflation gauge, the five-year breakeven forward, was at its highest level since January on Friday, at 1.55 percent.

Source: Arab News