Italian bond yields rose again on Wednesday, with investors turning their attention to the country's credit ratings outlook after a senior Moody's Analytics economist told a newspaper that Italy's budget plan was "a mistake."
Italian bond yields rose up to 11 basis points in early trade following a volatile session on Tuesday.
Analysts attribute the move to the La Stampa newspaper report citing Mark Zandi. Moody's Analytics is a subsidiary of the credit agency that focuses on non-ratings activity.
A downgrade of the Italian debt by credit rating agencies is possible, a prominent lawmaker of the ruling League party said on Wednesday, as market concern over the financial sustainability of the new government budget targets mounted.
Leaders of the ruling coalition, Luigi di Maio and Matteo Salvini, on Wednesday, reiterated that the budget would not be amended.
"Investors are very sensitive regarding the rating outlook," said Rene Albrecht, rates strategist at DZ Bank.
"Any news about rating actions is moving BTPs. Rome is not just on a collision course with Brussels but also with the rating agencies."
Moody's and S&P Global, which both rate Italy two notches above junk, are due to provide an updated opinion on Italy's credit rating in the second half of October. Analysts say around one downgrade is already priced in.
"The outlook after the downgrade is now the focus," said Albrecht. "It will be a volatile session again but we think the government is now more spread-sensitive."
Analysts say that should the spread of Italy's 10-year bond yield over Germany remain above a 300 basis point "threshold" the government would likely move to soothe markets.
The gap was at around 303 bps on Wednesday, having hit a five-year high around 316 on Tuesday.
Italy's 10-year bond yield was six basis points higher on the day at 3.59 per cent but off 4-1/2 year highs hit on Tuesday.
It's two and five-year bond yields were around seven basis points higher.
Investors will be looking for further direction from Economy Minister Giovanni Tria, who is due to speak at 10:00 am a local time. Tria on Tuesday pledged to do whatever was necessary to restore calm if market turbulence triggered a financial crisis, helping to stem the selling of Italian bonds, known as BTPs.
European banking supervisors have stepped up their monitoring of liquidity levels at Italian banks after the sharp increase in bond yields, though there was no cause for alarm, a senior EU source said on Tuesday.
Elsewhere euro zone bond yields were up to one basis point higher, with Germany's 10-year yield, the benchmark for the region, at 0.542 per cent.
(With inputs from agencies.)