Italy's government borrowing costs rose to their highest level in three weeks on Monday, pushed up by heightened concern that a deteriorating economic outlook will worsen the country's fiscal position. The sell-off in Italian bonds, which saw yields across the curve rise up to eight basis points, stood out against stability in broader eurozone bond markets.
Data last week confirmed that Italy's economy slipped into a recession in the fourth quarter of 2018, while manufacturing activity contracted for the fourth month running in January -- suggesting that things could get worse for the economy. Weaker data, in general, has bolstered eurozone bond markets as investors bet the European Central Bank will keep record-low rates in place for longer.
But in Italy, the poor data has been viewed as evidence that the economic growth assumptions behind the Italian government's budget deficit forecasts last year were too optimistic, signalling a further deterioration in public finances. Italy is one of the most indebted countries in the single currency block.
"The scepticism that we saw last year about the wisdom of the new government's fiscal plans is being revived by the economic data," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London. "There is a decent chance that we will see another quarter of negative growth in Q1."
Daiwa expects the Italian economy to grow just 0.1 per cent in 2019. Last month, the Bank of Italy cut its 2019 economic growth forecast to 0.6 per cent from 1 per cent. In early Monday trade, Italian 10-year yields rose to 2.797 per cent, their highest level since mid-January, before pulling back to around 2.78 per cent -- still up five bps on the day.
Two- and five-year yields were up a similar amount, while the 10-year Italian/German bond yield spread was at around 260 bps compared with 256 bps late on Friday. Outside Italy, yields on most 10-year bonds in the euro area were a touch higher on the day. Trading in broader financial markets was subdued by holidays in Asia for Chinese New Year.
(With inputs from agencies.)