Italian yields spike higher on Salvini threat, lacklustre debt auction

LONDON: Italian government bond yields rose sharply on Tuesday with the two-year close to its highest level this year after comments from Deputy Prime Minister Matteo Salvini and a lacklustre debt auction renewed focus on Italy's slow growth and rising debt.

Salvini said Rome was ready to break European Union budget rules if necessary to spur job creation.

"If we need to break some limits, like the 3% (deficit-to-GDP ratio) or 130-140% (debt-to-GDP ratio), we're ready to go ahead. Until we arrive at 5% unemployment, we will spend everything that we should, and if someone in Brussels complains, that won't be our concern," he told reporters.

Italy's 10-year bond yield hit a two-month high of 2.755%, up 6 basis points on the day, while shorter-dated two-year and 5-year yields rose around 8 bps each.

The closely watched spread between 10-year Italian and German bond yields hit its widest level in three months at 282.6 basis points.

This is not the first time an Italian politician has challenged EU budgetary rules; as recently as last week Salvini said that Rome was ready to push Italy's budget deficit above the EU's 3% ceiling.

But it comes at a time of heightened sensitivity to Italian risk due to the proximity to the European elections, heightened tensions within Italy's ruling coalition, the US trade war with China, and after a lacklustre bond auction.

"In this context, there is heightened sensitivity to these headlines," said Antoine Bouvet at Mizuho. He said he could not recall a time when Salvini had specifically mentioned the 130-140% GDP ratio.

Bouvet said the more pronounced sell-off in Italy's shorter dated bonds -- its 2-year and 5-year yields rose up to 8 basis points versus the 4 basis point rise in the 10-year -- indicated greater investor nervousness about Italy than if it was just the 10-year moving.

Italy sold the top planned amount at a bond auction on Tuesday, but paid higher yields.

The Rome-based Treasury auctioned 3-, 7- and 30-year nominal BTP bonds, with orders totalling 1.46 times the 6.75 billion euros ($7.6 billion) sold.

Nordea analyst Jan von Gerich said the auction went "quite well but not great".

Elsewhere the 10-year German government bond yield touched a new six week low of -0.083%, within a whisker of the 2-1/2 year low of -0.094% hit in late March on the back of trade war tensions and euro zone growth concerns.

The ZEW economic sentiment survey showed the mood among German investors deteriorated unexpectedly in May.