Italian bond yields jump as EU fails to agree rescue package

Italian government bond yields rose sharply on Wednesday after European Union finance ministers failed to agree on a rescue package to help economies recover from the impact of the coronavirus outbreak.

Diplomatic sources and officials said a feud between Italy and the Netherlands over what conditions should be attached to eurozone credit for governments fighting the pandemic was blocking progress on half a trillion euros worth of aid. Heavily indebted Italy, one of the countries hardest hit by the pandemic, has been lobbying for more economic support including some form of debt mutualization.

The European Central Bank, which has showered the region with more cheap cash to aid recovery and scaled up its bond-buying scheme to keep borrowing costs low, has said EU governments must ramp up their fiscal stimulus. "There were expectations that at least they (EU ministers) would come up with a cheap compromise," Jan von Gerich, a fixed-income strategist at Nordea, said.

"What we know from the leaks is that they haven't even got that agreement. It becomes very challenging for countries like Italy. The ECB doesn't want to take all the risks. They don't want to hold half of Italy's debt when the debt is unsustainable." Officials told Reuters that the ECB had told eurozone finance ministers that the eurozone could need fiscal measures worth up to 1.5 trillion euros ($1.6 trillion) to tackle the economic crisis caused by the epidemic.

Italy's 10-year bond yield rose as much as 20 basis points, hitting its highest since March 19 at 1.748% before slipping back. It was last up 11 bps. The 2-year yield was last up 14 bps at 0.72%.

The gap between benchmark 10-year German and Italian bond yields, a gauge of the risks investors attach to lending to Italy, expanded to more than 200 basis points, at one point hitting its widest since March 20. The cost of insuring against southern European sovereign debt also rose, with the five-year credit default swap for Italy up 15 bps, according to IHS Markit. Spanish CDS rose 7 bps, and Portugal's by 5 bps.

Italy's bank index fell 2.4% Nordea's von Gerich said the ECB, at least privately, would be happy for Italian yields to rise as long as the moves were not too dramatic, in order to send a message to EU ministers that they needed to reach an agreement on fiscal support.

Italian 10-year bond yields rocketed past 3% last month but ECB actions have brought them back down. Other southern European bond yields rose on Wednesday too but the moves were more modest - analysts say that given Italy's push to get the EU to agree to debt mutualization, it had the most to lose from the failure to reach an agreement.

The Greek 10-year yield climbed 4 bps to 1.87%, while Portugal's rose 3 bps to 0.923%. UniCredit analysts noted that new ECB measures announced on Tuesday make Greek government bonds eligible as collateral in Eurosystem credit operations.

German yields dipped as investors sought some safety in the region's best-rated bonds. The 10-year yield fell 3 bps to -0.34%. ($1 = 0.9207 euros)