LONDON: The gap between Italian and German bond yields reached its widest in just over five years on Thursday, as Italian government bonds came under renewed selling pressure in late trade.
Two- and five-year Italian yields rose to near three-month highs, while 10-year yields hit their highest since a bond market rout on May 29 and other non-core euro zone debt markets also came under pressure.
Analysts cited a pick up in global risk aversion driven by turbulence in emerging markets and some concern before an Italian ratings review on Friday for the late selloff in Italian debt.
Emerging currencies sold off sharply again on Thursday after Argentina's peso suffered its biggest one-day decline since 2015 overnight.
Earlier in the session, Italy sold 7.75 billion euros of new bonds in auctions that met with decent demand. But the stability following the auction proved short-lived, in what turned out to be another day of volatile trade.
Italy's two and five-year yields hit 1.42 percent and 2.55 percent respectively . Ten-year yields rose to almost 3.24 percent, their highest level since May 29 when a political crisis in Rome sparked a market rout.
The gap between Italian and German 10-year bond yields pushed out to around 288 bps - the widest since July 2013.
"(The move) certainly fits the general risk-off tone," said Richard McGuire, head of rates strategy at Rabobank. "Treasuries, Bunds and Gilts are all bid this afternoon and stocks are suffering against a backdrop of emerging market concerns."
McGuire added that the sell-off in Italian bonds could have been exacerbated by "trepidation ahead of a ratings review tomorrow", though he pointed to the widening in other peripheral bonds as evidence that the move was not confined to Italy.
Greek bond yields were up by as much as 16 bps with five-year yields reaching a two-month high at 3.38 percent.
German 10-year bond yields, the benchmark for the region, fell five bps to 0.36 percent. In keeping with the broader flight to quality, European stocks were down 0.3 percent .
One Italian government bond trader told Reuters that speculation about a downgrade of Italy's sovereign rating could explain the underperformance of the country's debt.
Analysts do not expect Fitch to downgrade Italy on Friday although the increased spending plans of the new government have raised concerns about the ratings outlook.
BBVA strategist Jaime Costero Denche said one possible explanation for the weakness in Italian bonds was post-auction selling by primary dealers.
"Our feeling is that Italian primary dealers had possibly more Italian bonds after the auction than they could sell to clients so were selling in the secondary market," he said.
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