Italy's bond yields surge after budget plans; German 10-year hits 12-year high

Germany's 10-year yield was last up 9.8 bps at 2.93% after hitting its highest level since July 2011, with investors closely watching consumer price index (CPI) data, with the national figure due at 1200 GMT, ahead of euro zone inflation numbers on Friday. Economists polled by Reuters expect inflation to fall.

Italian yields surged on Thursday after the government cut its growth forecasts for this year and next and hiked its budget deficit targets, while Germany's 10-year yield hit a fresh 12-year high ahead of inflation data for September. The deteriorating outlook for the Italian economy poses a challenge for Prime Minister Giorgia Meloni, who must find a way to finance tax cuts promised in the 2024 budget to be presented next month without risking a selloff of Italian debt.

Italy's 10 year yield rose 11.3 basis points (bps) to 4.89%, after touching a one year high. The two-year yield surged 9.8 bps to 4.14% after briefly touching an 11-year high. Germany's 10-year yield was last up 9.8 bps at 2.93% after hitting its highest level since July 2011, with investors closely watching consumer price index (CPI) data, with the national figure due at 1200 GMT, ahead of euro zone inflation numbers on Friday.

Economists polled by Reuters expect inflation to fall. The data could give investors more clues on whether the European Central Bank (ECB) will pause its monetary tightening cycle, after it raised its key interest rate to a record high of 4% in September but, with the euro zone economy in the doldrums, signalled that the hike was likely to be its last. The gap between Italian and German 10-year yields reached 196 bps, after briefly hitting 199, its widest since March when markets were gripped by a crisis in the global banking sector.

The spread serves as a gauge of appetite among investors to hold Italian debt - a higher number reflects the size of the premium a bondholder will demand to own Italian bonds rather than German paper. Althea Spinozzi, Saxo Senior Fixed Income Strategist, said she was closely watching the spread.

"The underperformance of (Italian) BTPs is linked to yesterday's fiscal budget in Italy ... I am closely monitoring the BTP/Bund spread because whenever it breaks above 200 bps, and sustains above this level for a while, it becomes a political problem for both the ECB - because it doesn't want to tighten financial conditions more in Italy than elsewhere - and for the Italian government," Spinozzi said. Higher costs of borrowing could lead to political instability in Italy, she added.

Inflation data from German states, released earlier on Thursday and used to calculate the preliminary national figure, showed price growth declined in several states in September. "If (Germany's CPI) surprises on the downside, it might be a reason for European sovereign yields to stop their rise," Spinozzi said.

In the meantime, five economic institutes are predicting gross domestic product (GDP) in Germany will contract by 0.6% in 2023, as rising interest rates take their toll on the euro zone's largest economy and high inflation depresses consumption. Euro zone economic sentiment fell for a fifth consecutive month in September although by slightly less than expected, as the mood in services, retail and among consumers slipped, but for industry it improved after seven months of decline.

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