Italian bond yields rise as German support for joint EU debt seen as unlikely

By Harry Robertson

LONDON (Reuters) -Italian 10-year bond yields rose on Tuesday after a German official dismissed a report that the country’s government planned to support the issuance of joint European Union debt.

German yields fell, having jumped the previous day after Bloomberg reported that the government would support issuing joint EU debt to tackle the energy crisis.

However, a German government official later on Monday told Reuters that “such plans are not known in the government.”

Italy’s 10-year government bond yield was last up 9 basis points to 4.701%, although it remained below the 9-year high of 4.927% touched on Sept. 28. Yields move inversely to prices.

The yield on Germany’s 10-year bond was down 2 bps at 2.307% on Tuesday, although it remained well above Friday’s closing level, having risen 13 basis points on Monday.

Under a joint debt issuance plan, EU countries would effectively combine their creditworthiness, pushing up borrowing costs for stronger economies such as Germany, but pulling them down for bigger debtors such as Italy.

The Reuters report “has helped to stabilize Bunds while BTPs are under pressure, or at least reversing some of the gains that they had yesterday after the Bloomberg story,” said Christoph Rieger, head of credit research at Commerzbank. German government bonds are known as Bunds, while their Italian counterparts are commonly called BTPs.

Rieger said worries about disorder in Britain’s bond markets and a costly German 30-year Bund sale likely added to selling pressure in Europe on Tuesday.

Germany and the European Union saw lacklustre demand for long-dated debt sales that raised a combined 14 billion euros, demonstrating the challenges for borrowers in a market rattled by the ramifications of Britain’s budget and the potential for further debt issuance to tackle the energy crisis.

The gap between Italy and Germany’s 10-year yields widened 14 bps to 238.85 bps, after falling 25 bps on Monday. Analysts watch the so-called spread closely, as a sign of the differing pressures on Europe’s economies.

Traders in euro zone bond markets were also nervously analysing the latest intervention from the Bank of England, which was forced to start buying index-linked government bonds on Tuesday as the country’s market turbulence continued.

The Bank of England confirmed it bought 1.947 billion pounds ($2.15 billion) of inflation-linked British government bonds on Tuesday, its first emergency purchase operation for gilts of this type..

The yield on British 10-year bonds fell 5 bps to 4.418%. It nonetheless remained around 130 bps higher over the last month.

“Definitely there’s a lot of jittery moves,” said Ravin Seeneevassen, senior portfolio manager at Allianz Global Investors. “The fiscal situation is coming to the front again, whether that’s in Germany or in the UK.”

As traders weighed up reports on mutual debt issuance, the EU kicked off a fixed income sale on Tuesday. It will raise 11 billion euros from the reopening of a 2029 bond and the sale of a new 20-year bond that will back its COVID-19 recovery fund and macro-financial assistance programme, according to a lead manager memo seen by Reuters.

($1 = 1.0311 euros)

(Additional reporting by Yoruk Bahceli and Lucy Raitano; Editing by Kirsten Donovan and Bernadette Baum)