LONDON: Italian government bonds were set for their worst sell-off in three months on Thursday, with analysts citing worries over struggling lender Banca Carige as the main trigger in a market with little liquidity.
A broader market sell-off, which saw US stocks sink nearly 3 percent and German bond yields hit a two-year low, also contributed to the move, the analysts said.
The European Central Bank appointed three temporary administrators on Wednesday to take charge of Italy's Carige Bank in an unprecedented effort to save the struggling lender after it failed to raise new capital.
Italy's banking system, which is choked with large levels of non-performing loans, is seen as one of the biggest potential drags on the country's economy.
Concerns over whether struggling lenders would need state support - and therefore drive higher public spending - also tend to push government bond yields higher.
"Banca Carige is a major trigger for Italian bonds today, investors are concerned that it may eventually need state support," said Natixis strategist Cyril Regnat.
"It looks very much like an Italian banking story hurting govvies today, which quickened after the US open," he added.
The Italian government is monitoring Banca Carige's situation carefully, Deputy Prime Minister Luigi Di Maio said on Thursday.
DZ Bank rates strategist Daniel Lenz agreed this was one of the triggers for the move, but added the lack of ECB support for government bonds may have exacerbated the sell-off; the bank ended its 2.6 trillion euro bond-buying scheme at the end of 2018.
"If this trend continues, we may have to re-think how this market is affected in reality by the withdrawal of ECB purchases," said Lenz.
The yield on Italy's 10-year bond was set for its biggest one-day rise in over three months, up 17 basis points (bps) to 2.865 percent.
The closely-watched Italy/Germany 10-year bond yield spread was 20 bps wider at 272 bps.
Italy's short-dated two- and five-year yields were up 11-15 bps on the day .
These yields were also affected by a "risk-off" sentiment hitting global markets, both strategists said.
In Wall Street, the Dow Jones Industrial Average fell more than 600 points on Thursday as the biggest drop in more than a decade in the ISM US manufacturing index added to nerves over slowing global growth sparked by a revenue warning from Apple.
Safe haven German government bond yields hit their lowest in over two years soon after the US open, dropping as low as 0.146 percent at one point.
Other high grade euro zone bond yields were also lower on the day,.
"The market is pushing back even further the rate hike for the European Central Bank, now to the middle of 2020, and this is backed up by the latest run of data," said Rainer Guntermann, rates strategist at Commerzbank.
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