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European government bond prices fell sharply on Thursday as investors spooked by Italy’s higher-than-expected budget deficit and growing concerns that the central bank will keep interest rates high for an extended period of time.
Italy’s 10-year government bond yield rose 0.18 percentage point to 4.95%, after Prime Minister Giorgia Meloni’s government raised its budget deficit target and revised down its growth outlook for this year and next. It was the highest level in years.
The sell-off spread to British markets, with the 10-year bond yield rising 0.18 percentage point to 4.54%, the biggest single-day rise since February. Investors said concerns that the US Federal Reserve will keep interest rates “high for an extended period of time” are spreading to European markets.
“There’s a wall of fear in the bond market, and the latest trigger has been oil prices,” said Jim Reavis, a fund manager at M&G Investments. He added that the recent rise in oil prices, which hit a 10-month high on Thursday, has investors wondering “what if inflation wasn’t dead?”
In the euro zone, Italy’s borrowing is expected to rise after the French government was criticized by the country’s fiscal watchdog on Wednesday for not cutting public spending enough to avoid breaching EU fiscal rules next year. It became.
France’s 10-year bond yield rose to 3.54%, its highest level since 2011. The spread between equivalent yields on Italian government bonds and ultra-safe bonds, a closely watched measure of market risk in the euro zone, has reached its widest level since 2011. US banking crisis in March.
“The inherited story is a financial story,” said Mike Liddell, fixed income portfolio manager at Allianz Global Investors. “Deficits are likely to be larger than previously expected, meaning bond vigilantes are on the rise again and deficits appear to be widening structurally, not just cyclically.” The market just doesn’t accept it.”
Concerns about rising borrowings are putting further pressure on a bond market already reeling from worries about rising interest rates over time. Germany’s 10-year bond yield, a benchmark for the eurozone, rose to 2.97%, its highest level in more than a decade. Spain’s 10-year bond yield exceeded 4% for the first time since 2013.
Central banks are nearing the end of a historic series of interest rate hikes, but have said they expect borrowing costs to remain high for an extended period of time to ensure inflation is on target before considering rate cuts. There is.
Analysts said Thursday’s move was particularly sharp in Britain, as government bonds have been rising in recent weeks as markets brace for the end of the Bank of England’s interest rate hike cycle. Pooja Kumra, a strategist at TD Securities, said investors who had taken positions for lower yields rushed to sell as the market moved against them.
In the U.S., the 10-year Treasury yield rose 0.03 percentage point to 4.66%, a move that began after the Federal Reserve signaled last week that interest rate cuts next year and in 2025 would be much more gradual than investors had priced in. The decline in prices widened further. in.
Pete Haines Christiansen, director of fixed income research at Danske Bank, said the bond market was “caught in a perfect storm.”
He added: “The ‘secular rally’ has caught investors off guard by mispositioning them, and coupled with significant budget deficit revisions in France and Italy and rising oil prices as inflation expectations remain high, this “It encouraged sales,” he added. ”
The higher borrowing costs were reflected in Italy’s finance ministry’s sale of 3 billion euros of 10-year bonds on Thursday. These gave investors a yield of 4.93%, the highest since 2012 and up from 4.24% for similar bonds last month.
Italy’s government said late on Wednesday that this year’s budget deficit is expected to be 5.3% of gross domestic product (GDP), citing the soaring costs of a controversial tax credit system for home renovations. This exceeded the target of 4.5% set in April.
Rome has raised its budget deficit target for next year to 4.3% of GDP, up from the original target of 3.7%. He said this would help fund top policy priorities, such as supporting low-income households and providing financial support to Italians. More babies.
“The unexpected upside in Italy’s deficit forecast is a clear trigger for today’s spread widening, which ultimately [a] It increases the supply of bonds for the market to absorb,” said Frédéric Ducrozet, head of macroeconomic research at Pictet Wealth Management.
Rising oil prices have heightened market concerns about continued inflation and monetary tightening. Brent crude oil hit a 10-month high of more than $97 a barrel early Thursday, but has since fallen back.
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