LONDON: Italian government bond yields jumped on Friday after dismal factory activity data fuelled concern about a rising budget deficit and the outlook for an economy that slipped into recession at the end of last year.
Italian manufacturing activity contracted for the fourth month running in January and at its sharpest rate since 2013, a survey showed, pointing to ongoing economic weakness.
The euro zone's third-largest economy fell into recession at the end of last year, data showed on Thursday, and Friday's Purchasing Managers' Index suggested things could even get worse.
Italy's 10-year bond yield jumped as much as 15 basis points to 2.74 percent -- set for its biggest one-day jump in a month.
For bond investors, the data is just another sign that the economic growth assumptions behind the Italian government's budget deficit forecasts last year were too optimistic.
Indeed, the scale of the selloff in Italy's bond market on Friday was reminiscent of the selling last year when concerns about the Italian government's spending plans rattled investors.
"There is a lot of chat about the technical recession and what that means for budget deficit slippage," said Rabobank rates strategist Lyn Graham-Taylor. "The PMI data adds to the economic gloom and has raised concern that the budget deficit will be worse than thought and that has spooked the market."
The gap between benchmark 10-year bond yields in Italy and Germany widened to around 257 bps, its widest since mid-January and up more than 10 bps from late Thursday levels.
Two and five-year Italian bond yields were also more than 10 bps higher on the day, in a sharp underperformance versus euro zone peers .
"While of course the GDP figure concerns Q4 last year, today's PMI shows that the negative momentum is just continuing into 2019," said Natixis rates strategist Cyril Regnat.
"Some investors are now maybe revising their expectations for Italian GDP growth prospects for 2019."
Outside Italy, euro zone bond markets were largely stable, with yields inching up marginally after latest euro zone inflation data.
Inflation in the euro area slowed to 1.4 percent in January from 1.6 percent a month earlier, Eurostat said on Friday.
Still, a pick-up in core inflation or prices excluding food and energy to 1.2 percent from 1.1 percent may be somewhat comforting for the European Central Bank.
Germany's 10-year Bund yield was marginally higher on the day at 0.16 percent, but close to one-month lows hit a day earlier
As long-dated yields have pushed lower this week on deepening concerns about the growth outlook, the gap between two and 10-year German yields briefly touched 69.70 bps - its tightest level since late 2016.
Comments
Comments are closed.