The gap between yields on Italian and German benchmark government bonds was at its widest level in two years on Friday, a sign of fears that raising interest rates in the eurozone could hit growth in southern European economies.
The extra yield, or spread, on Italian 10-year bonds over their German equivalent rose to 2.007 percentage points, its highest level since May 2020, according to Tradeweb.
While investors have broadly been selling eurozone government bonds, causing yields to rise, the gap indicates a preference to hold German debt, seen as among the safest in the world, over Italian debt.
Investors are increasingly expecting the European Central Bank to raise interest rates in July, according to ING Bank. Robert Holzmann, the governor of Austria’s central bank, recently said that rate rises would be discussed during the central bank’s June meeting.
The Federal Reserve approved a rare half-percentage-point interest-rate increase—the largest since 2000—earlier this week, in an effort to combat inflation. Headline inflation in the eurozone reached 7.5% in April, according to preliminary estimates by Europe’s statistics office.
ECB officials have tried to limit the gap in borrowing costs between highly indebted countries such as Italy and those with healthier budgets such as Germany. ECB President Christine Lagarde spooked markets near the start of the pandemic by saying that the ECB was “not here to close spreads.” After the comment, officials scrambled to reassure investors that it would step in to support countries such as Italy if their debt came under heavy selling pressure.
The ECB said earlier this year that it would likely end its bond-buying program, known as quantitative easing, or QE, by September.
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