Italy sovereign debt risk premium at four-month high before budget

It plans to raise its 2024 budget deficit target to between 4.1% and 4.3% of gross domestic product (GDP) from the 3.7% goal set in April, sources told Reuters on Monday. Italy's 10 year yield rose 4.6 basis points (bps) to 4.78%, a fresh 11-month high, and the gap between Italian and German 10-year yields reached 195.1 bps, its widest since May 5, and also the first time it has risen above 190 bps since then.

Italy's sovereign debt risk premium hit a more than four month high on Wednesday as investors repositioned for lower growth and higher deficit figures ahead of the county's budget plan. The Italian government is due to set the framework for next year's budget. It plans to raise its 2024 budget deficit target to between 4.1% and 4.3% of gross domestic product (GDP) from the 3.7% goal set in April, sources told Reuters on Monday.

Italy's 10 year yield rose 4.6 basis points (bps) to 4.78%, a fresh 11-month high, and the gap between Italian and German 10-year yields reached 195.1 bps, its widest since May 5, and also the first time it has risen above 190 bps since then. A widening gap between the German and Italian yields shows fund managers require a higher return to invest in Italian bonds versus the European benchmark.

Some analysts said however, that it was unlikely to widen much more from here. "Despite the choppy market backdrop, the 200 basis points level seems a high hurdle for BTPs (Italian government bonds) in the absence of further fiscal slippage," Michael Leister, head of interest rates strategy at Commerzbank, said.

However, more volatility could lie ahead. "The debate around the Italian budget will stoke volatility in Italian sovereign debt also because negotiations on the European new fiscal rules are entering a crucial stage," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

European finance ministers are working to have a reform of the Stability and Growth Pact ready by the end of the year. The European Commission proposed to change the EU's fiscal rules to require governments to negotiate debt reduction paths of a length linked to reforms and investments. Some members, including Germany, remain sceptical.

If European countries exceed the deficit ceiling or expenditure limits, there will still be disciplinary steps, with smaller but swifter fines for breaches. LESS INVERTED

Germany's 10-year yield, the benchmark for the euro area, rose 3 bps to 2.83% a fresh over 12 year high. Government bonds around the world have been under pressure in recent weeks particularly at the longer duration end of the market.

As a result, the German yield curve hit its least inverted level since May 2022 on Tuesday, with the gap between Germany's 2-year and 10-year yields was at -40.1 bps, its least inverted since mid-August. European Central Bank officials have in recent days said policy rates will stay at the current levels for an extended period to tame inflation.

They also flagged the chance of another rate hike after the central bank raised the deposit facility rate to 4%. Economic growth is more sluggish than the ECB expected, but the goal is to control inflation, so interest rates could still go higher if needed, ECB board member Frank Elderson said.

Market bets on ECB rates priced in an about 25% chance of a 25 bps rate hike by December.

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