Investors were alarmed by Italy’s bigger than expected budget deficit, and growing concerns that central banks would keep interest rates high indefinitely.
The yields on Italian 10-year government bonds rose by 0.17 percentage points, to 4.96 percent, the highest in over a decade. This was after Prime Minister Giorgia Melons government increased its fiscal deficit target and reduced its growth forecasts for this year. Later, the yield fell to 4.88 percent.
The sell-off reached UK markets where yields on 10-year bonds rose by 0.2 percentage points, to 4,57 percent — the largest daily increase since February — and ended the day at 4,48 percent. Investors expressed concern that fears of the US Federal Reserve holding rates “higher longer” had spread to European markets.
Jim Leaviss is a fund manager with M&G Investments. He said that the rise in oil prices, which reached a 10-month high on Thursday, was causing investors to worry. He said that investors were worried about inflation because of the recent rise in oil prices, which reached a 10-month-high on Thursday.
The country’s fiscal watchdog criticised the French government on Wednesday for failing to cut public spending in order to avoid a breach of EU fiscal rules the following year. France’s 10-year bond yield jumped to more than 3.5 per cent, its highest level since 2011. The spread between Italian bond yields and their ultra-safe German equivalents — a closely watched measure of market risks in the euro area — reached its widest level since the US banking crisis in March.
Mike Riddell is the fixed-income portfolio manager of Allianz Global Investors. Budget deficits will likely be larger than expected. You have a resurgence of bond vigilantes – where the markets will not tolerate what appears to be structurally higher but not just cyclical deficits.
Bond Market is already under pressure due to concerns about a prolonged period of high rates. The benchmark German 10-year yields, which are the highest in more than a century, climbed to 2.98 percent. Spain’s 10-year bonds yield soared above 4% for the first since 2013.
The central banks have indicated that they will not be cutting interest rates until inflation reaches their target.
Analysts noted that Thursday’s movements were especially sharp in the UK, because gilts rallied in recent months as markets prepared for the end of the Bank of England cycle of rate increases. TD Securities strategist Pooja Kumara said that investors who had positioned themselves for lower yields rushed into selling as the market moved in their favor.
The yields on US Treasury bonds have increased sharply after the Fed announced last week that it would reduce rates next year and by 2025 much more slowly than investors had anticipated. The 10-year yield was unchanged on Thursday, at 4.61 percent.
Piet Haines Christiansen said that the bond market is “caught up in a perfect hurricane”.
He said: “The higher for longer has caught investors who have wrongly positioned themselves off-guard, and this coupled with higher revisions of the French and Italian deficits as well the higher oil prices keeping inflation expectations high has driven this sale.”
The Italian Treasury sold €3bn of bonds with a 10-year maturity on Thursday, reflecting the rising borrowing costs. Investors received a yield of 4.93 percent, the highest since 2012. This was an increase over the 4.24 percent on a bond similar to this one last month.
The Italian government predicted late Wednesday that this year’s Fiscal Deficit will be 5.3 percent of the gross domestic product. This is up from the April target of 4.5 percent. It cited the rising cost of the controversial tax credit scheme to improve homes.
Rome raised its deficit target for next year to 4.3 percent of GDP from its initial target of 3.7 percent, saying that it would allow them to fund their top priorities, such as helping low-income households and encouraging Italians to have more children.