Tags: Fed | Italy | bond | costs

Italy Bond Costs Rise After Fed Hints at Stimulus Exit

Wednesday, 29 May 2013 11:08 AM

The 10-month-long rally in vulnerable euro zone bonds may be coming to an end following the U.S. Federal Reserve's hint that it will turn off the taps and as the European Central Bank's back-up pledge hits its limit.

Italian short-term debt costs rose at an auction on Wednesday for the first time since March and long-term yields are expected to edge up at a bond sale on Thursday.

It followed an auction last week at which Spain had to pay more to sell debt for the first time since early February.

These developments signal the market environment is changing after a strong rally in high-yielding bonds, analysts said.

The rise in borrowing costs follows Fed Chairman Ben Bernanke's reminder to markets that the flood of liquidity from central banks will not last forever.

"Going forward, the Federal Reserve will be the main driver for the Italian bond market, as well as the German bunds," said Chiara Manenti, fixed-income strategist at Intesa Sanpaolo.

Should the Fed taper its asset-buying program, as Bernanke suggested, U.S. Treasury bond yields will head north and bunds will follow, dragging peripheral debt yields higher, too.

"This does not mean an automatic widening of spreads between peripheral bonds and core-Europe debt, but it will certainly bring a more volatile environment for sovereign issuers and investors," Manenti said.

The impact of the ECB's pledge to buy bonds of troubled euro zone economies in certain circumstances may have run its course in terms of how far down it can push yields, although it is likely to remain a backstop for the market.

"The effect of the ECB's pledge has been very strong," said Alessandro Giansanti, fixed-income strategist at ING. "But with the spread (between Italian and German bond yields) approaching its fair value, the ECB's impact is lower."

The premium paid by 10-year Italian bonds over safer German bunds fell to 250 basis points at the beginning of May as investors, emboldened by the ECB's shield, hunted for yield in a market swamped with cash pumped in by the central banks.

Before ECB President Mario Draghi outlined the central bank commitment to buy unlimited quantities of euro zone members' bonds if needed, the spread stood at around 450 basis points.

Giansanti considers 200 basis points fair value for the Italy/Germany spread unless the growth outlook for Italy improves or rating agencies revise their verdict on the country.

A trader in London said that, although small, the recent rise seen in peripheral debt costs could put pressure on investment positions built to take advantage of cheap liquidity.

 

© 2017 Thomson/Reuters. All rights reserved.

 
1Like our page
2Share
Markets
The 10-month-long rally in vulnerable euro zone bonds may be coming to an end following the U.S. Federal Reserve's hint that it will turn off the taps and as the European Central Bank's back-up pledge hits its limit.
Fed,Italy,bond,costs
427
2013-08-29
Wednesday, 29 May 2013 11:08 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved