* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts to lead with Italy)
LONDON, May 17 (Reuters) – Italy’s 10-year bond yield rose to its highest level in more than eight months on Monday, as unease over a slowing down of central bank bond buying continued to trigger selling in peripheral euro zone debt markets.
A recovering economy that could encourage the European Central Bank (ECB) to slow the pace of its emergency PEPP bond purchases, a pick up in the COVID-19 vaccine rollout that boosts the growth outlook and rising U.S. inflation have renewed upward pressure on sovereign bond yields.
Italian government bonds, a big beneficiary of ECB asset purchases, have borne the brunt of the selling – 10-year yields rose almost 16 bps last week in the biggest weekly jump in over a year. When a bond’s yield rises, its price falls.
That weakness continued into a new week. Italy’s 10-year bond yield rose to 1.127%, its highest since September and pushed the gap over benchmark German Bunds to over 122 bps – the widest since January.
Analysts said comments over the weekend from Matteo Salvini, leader of Italy’s right-wing League party, could be one reason for the bond selloff.
Salvini said Italian Prime Minister Mario Draghi will be unable to enact key reforms demanded by the European Union because his unity government is too divided over the issues.
Althea Spinozzi, fixed income strategist at Saxo Bank, added that news on Monday that Hungary’s central bank could soon consider lifting interest rates may have fed unease in bond markets over the direction of ECB policy.
“The problem we have is that peripheral bond yields are so low, they would be the first to re-price if there’s concern about ECB tapering or rate hikes,” said Spinozzi, adding that she was still positive on Italian bonds.
Germany’s Bund yield was steady at -0.12%, having risen as high as -0.096% last week, their highest level in almost two years.
So far, the rise in euro zone bond yields has not led to alarm in markets or among ECB officials as they did in February, a development analysts attribute to a stronger economic backdrop that justifies a re-pricing in bond markets.
“At this juncture, I don’t think there’s a case yet for the ECB to be alarmed too much, but that could change,” Cagdas Aksu, Barclays head of European rates research said in an audiocast.
Pictet Wealth Management strategist Frederik Ducrozet, said differences of opinion on the future pace of emergency bond purchases at the ECB added to market unease.
“I’m increasingly of the view that the ECB will find it difficult to materially reduce the pace of PEPP purchases at the June meeting,” he said.
Reporting by Dhara Ranasinghe; Editing by Kirsten Donovan and Himani Sarkar
