Italian Borrowing Plans Worry European Bond Market

Bond Market

Fiscal Policies Italy Spark Market Worries

Thursday’s European government bond market drop was caused by Italy’s larger-than-expected budget deficit. The announcement alarmed investors, who worried about central banks keeping interest rates high for a long time.

Italian 10-year government bond yields rose 0.17 percentage points to 4.96%, a decade-high. UK 10-year rates rose to 4.57%, their highest daily jump since February, before closing at 4.48%. Fear of the US Federal Reserve holding rates “higher for longer” contributed to market anxiety.

Concerns about rising oil prices and inflation

M&G Investments fund manager Jim Leaviss linked bond market fears to a “wall of worry,” with rising oil costs being a major cause. Oil prices hit a 10-month high on Thursday, prompting investors to consider inflation may be higher than expected.

Eurozone Under Pressure

In the euro area, concerns about rising Italian borrowing follow France’s fiscal watchdog’s criticism of the government. France’s 10-year bond market rate reached 3.5%, its highest since 2011. The disparity between Italian and safe German bond yields was biggest since the US banking crisis in March.

The developing fiscal narrative was highlighted by Allianz Global Investors fixed-income portfolio manager Mike Riddell. He stated that budget deficits were greater than expected, prompting a bond vigilante resurgence as markets became less tolerant of cyclical and structural deficits.

Global Bond Market Strain

A global bond market already worried about high interest rates was further pressured by rising borrowing concerns. Germany’s benchmark 10-year yields reached 2.98%, the highest in over a decade, and Spain’s crossed 4% for the first time since 2013.

Even as they near the end of a historic interest rate hike cycle, central banks signaled their intention to maintain borrowing rates high. The goal is to lower inflation to target levels before cutting rates.

UK markets move sharply

UK gilts have rallied in recent weeks as markets anticipated the conclusion of the Bank of England’s rate hike cycle, so Thursday’s market changes were significant. Investors who have positioned for lower yields sold quickly after the market move.

Perfect Bond Market Storm

Danske Bank Fixed-Income Research Director Piet Haines Christiansen called the bond market in a perfect storm. The sell-off was caused by central banks’ unanticipated “higher for longer” posture, French and Italian budget deficit revisions, and rising oil prices affecting inflation expectations.

Rising Borrowing Costs Affect Italy

In a €3 billion 10-year bond market offering on Thursday, Italy paid higher borrowing prices due to the instability. Investors accepted a 4.93% yield, the highest since 2012 and up from 4.24% on a similar bond last month. Italy blamed the rising expenses of a controversial home improvement tax credit system for the larger fiscal deficit.

Italian Fiscal Policies Draw Bond Market Attention

Italy’s late Wednesday announcement of a 5.3% fiscal deficit of GDP for this year, up from 4.5% in April, raised bond market fears. Rome raised next year’s deficit target to 4.3% of GDP to fund policy priorities like low-income family support and population growth incentives. The market response highlights the delicate balance countries must find in economic policy management under global uncertainty.