Italian risk premium above 200 bps for the first time since May 2020

Given the path the ECB is on, all things equal they are going to be tightening monetary policy into a slowdown, it's hard to see that spread not continuing to widen," Graham-Taylor said. In the broader market, euro zone bond yields steadied on Friday following a volatile session that saw bond yields swing sharply a day earlier.

The risk premium on Italian bonds rose above 200 basis points for the first time since the height of the pandemic on Friday, in the latest sign of the pressure facing the euro zone's more indebted states, as the ECB remains on track to unwind its monetary stimulus.

The closely watched gap between Italian and German 10-year yields, effectively the risk premium on the former's debt, rose above two percentage points for the first time since May 2020. The move came after 10-year yield surpassed 3% for the first time since late 2018 on Thursday. It has risen 26 bps this week, the biggest weekly jump in a month.

"There's been a pretty steep increase in Italy spread versus Germany," said Lyn Graham-Taylor, senior rates strategist at Rabobank. The spread has risen some 50 bps since the start of April and is wider than many analysts and investors expected only a month ago.

The moves have come as ECB policymakers are becoming more vocal about normalising monetary policy quicker than previously expected in recent weeks, with more policymakers backing a July rate hike publicly. The move is "definitely going to be attracting the interest of the (ECB) governing council. Given the path the ECB is on, all things equal they are going to be tightening monetary policy into a slowdown, it's hard to see that spread not continuing to widen," Graham-Taylor said.

In the broader market, euro zone bond yields steadied on Friday following a volatile session that saw bond yields swing sharply a day earlier. Fed chairman Jerome Powell on Wednesday explicitly ruled out raising rates by three-quarters of a percentage point. The news initially sent stocks rallying and bond yields lower, but that reversed sharply in later Thursday trade. Euro zone bond yields followed U.S. Treasury yields sharply higher.

By 0742 GMT, Germany's 10-year yield, the benchmark for the bloc, was unchanged at 1.04%. Two-year yields were up a basis point to 0.29% Money market bets on ECB rate hikes stabilized at levels seen before the Fed, pricing in more than 20 bps of hikes in July and over 90 by the end of the year.

Later in the session the focus will be on the U.S. April non-farm payrolls report, which is expected to show slightly fewer jobs were added to the economy in April than in March. Earlier on Friday, data showed German industrial production fell more than expected in March due to supply chain disruptions that made it harder to fill orders.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)