Eurozone bond yields spiked to multi-year highs, in response to predictions that central banks will continue tightening their monetary policy despite recession risks and a fresh sell-off in British gilts.
In the meantime, as the rightist alliance easily secured a majority in the elections on Sunday, the gap between Italian and German yields grew. Given the size of the country’s debt load, Italian bond (BTP) prices are also more vulnerable to changes in interest rate expectations.
Giorgia Meloni, who leads Italy’s most right-wing administration since World War Two, appears to become the country’s first female prime minister.
According to Erjon Satko, rate strategist at BofA, “short-term, if domestic political concerns remain relatively restrained, the short-base in BTPs may pressure spreads tighter.”
However, he continued, “with a number of central banks adopting a hawkish posture, the higher rates trend through terminal rate repricing likely remains the dominant driver.”
Germany’s 10-year yield reached 2.132%, its highest level since December 2011, and its 2-year yield increased to 2.013%, its highest level since December 2008.
The Ifo Institute stated on Monday that a recession is imminent for the German economy.
British government bond prices continued to fall, and short-dated rates increased by about 50 basis points on Friday as finance minister Kwasi Kwarteng announced a number of tax cuts in an effort to spur economic growth.
“Markets broadly predicted the outcome,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, “therefore Italy’s elections had little to do with today’s gap widening.”
Bond yields in Europe are interrelated, and the euro region is once again being impacted by the increase in British yields today, he continued.
Investors had already factored in the centre-right coalition’s victory, so any meaningful shift in sentiment among investors may require additional clarification of the new government’s strategy.
They perceive modest near-term risks of a conflict with the European Union. Meloni allayed concerns throughout her campaign by promising to follow EU budget regulations and putting an end to anti-euro rhetoric, which sparked a significant spread widening after the 2018 election.
Markets think a government might be formed by the end of October and will be watching the selection of the finance minister.
