Italian risk premium set for biggest weekly jump in two years after ECB

Elsewhere, Germany's 10-year yield, the benchmark for the euro area, was down nearly 3 bps to 1.40%, below the highest since 2014 it rose to on Thursday at 1.47%. Money markets priced in just over 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.

Southern European bond yields continued their march higher on Friday a day after the ECB announced it would end its long-running bond-buying programme 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 1042 GMT it was up 5 basis points (bps) to 3.74%. The spread over German 10-year yields, effectively the risk premium on Italian debt, rose to as high as 234 bps on Friday, the highest since May 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 colour (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 3 bps to 1.40%, below the highest since 2014 it rose to on Thursday at 1.47%.

Money markets priced in just over 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 2.10% by February 2024, compared to around 1.8% before the ECB's policy decision.

The ECB needs to take "resolute" action to tame inflation but it is also fully determined to contain any undue increase in Southern European borrowing costs, policymakers said on Friday. Austrian central bank governor Robert Holzmann, a hawk, said he wanted a larger rate hike than 25 bps in September.

Focus will also be on U.S. inflation data due at 1230 GMT.