Italian risk premium set for biggest weekly jump since April 2020 post-ECB

Elsewhere, Germany's 10-year yield, the benchmark for the euro area, was down nearly 2 bps to 1.42%, below the highest since 2014 it rose to on Thursday at 1.47%. Money markets continue to price in 75 bps of ECB rate hikes by September, after the ECB said next month's 25 bps rate hike could be followed by a bigger increment in September, depending on the inflation outlook.

Eurozone bond yields rose on Friday a day after the ECB announced it would end its long-running bond-buying program and start hiking rates from July. Southern European bonds remained under pressure as the ECB made no new commitments to counter fragmentation in the bloc's debt markets, which refers to situations where borrowing costs between member states diverge sharply.

On Friday, Italy's 10-year yield rose to its highest since 2018 at 3.78% in early trade, a touch below its highest since 2014. By 0733 GMT it was up 4 basis points (bps) to 3.73%. The spread over German 10-year yields, effectively the risk premium on Italian debt, rose to 231 bps on Friday, nearing its highest since the height of the COVID-19 pandemic in 2020.

That premium has risen 24 bps this week, the biggest weekly jump since April 2020, with most of the jump taking place on Thursday following the ECB's decision. "As more color (details) about the ECB discussions emerges, most of it does not sound encouraging for the periphery," said Christoph Rieger, head of rates and credit research at Commerzbank, referring to a Reuters story following the meeting which reported that there had been no debate about announcing a new anti-fragmentation tool.

"The bearish spread widening in the periphery underscores how nervous European government bonds are about the looming tightening and a potentially asymmetric transmission of rate hikes, which could cause problems for the periphery," he said. Elsewhere, Germany's 10-year yield, the benchmark for the euro area, was down nearly 2 bps to 1.42%, below the highest since 2014 it rose to on Thursday at 1.47%.

Money markets continue to price in 75 bps of ECB rate hikes by September, after the ECB said next month's 25 bps rate hike could be followed by a bigger increment in September, depending on the inflation outlook. However, they have increased their bets on the terminal rate, now pricing in rates rising to around 2% by February 2014, compared to around 1.8% before the ECB's policy decision.

Investors will watch speeches by German central bank governor Joachim Nagel, Austria's Robert Holzmann, and France's Francois Villeroy de Galhau on Friday for further clues about the ECB's thinking. The focus will also be on U.S. inflation data due at 1230 GMT.

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