Italy’s debt was liquidated on Thursday after Prime Minister Mario Draghi resigned and the European Central Bank sharply raised interest rates in its effort to control inflation.
The yield on Italy’s 10-year government bond rose as much as 0.27 percentage points to nearly 3.7 percent, as Draghi’s national unity coalition fell apart and the ECB raised its deposit rate by 0.5 percentage points to zero more than expected. Thursday’s rate hike was the ECB’s first since 2011 and ended an eight-year stretch of negative interest rates.
The fall in Italian bond prices pushed the gap between benchmark Italian and German 10-year yields, a closely watched gauge of market stress, to 2.38 percentage points, reflecting an increase from more than 0 .3 percentage points in just two days. Pressure on Italian debt eased slightly later in the session, with yields rising 0.15 percentage points to 3.5 percent, taking the spread to 2.32 percentage points.
The ECB had earlier signaled it would raise borrowing costs by 0.25 percentage points this month as it moved to tackle rapid growth in consumer prices, which hit a record high of 8.6% on the year until June
But on Thursday, the central bank said it had deemed it “appropriate to take a larger first step in its policy rate normalization path” due to inflation risks and the “strengthened support” provided by a new purchase program of bonds intended to limit the divergence in indebtedness. costs between the bloc’s strongest and weakest countries.
James Athey, a senior portfolio manager at Abrdn, suggested the move would provide investors with more security and confidence. “Central banks that have been more willing to take the nettle and raise rates more quickly have seen more stability in rate markets.”
The ECB’s decision came after Draghi handed in his resignation to Sergio Mattarella, the president of Italy, on Thursday morning. Draghi had won a confidence vote on Wednesday night but lost the support of his coalition members. Subsequently, Mattarella called early elections.
“The shocking collapse of the Draghi administration raises important questions ahead of the new election,” analysts at JPMorgan said. “The populist blow against Draghi heightens our sensitivity to the risks of erratic policymaking.”
In equity markets, a FTSE gauge of Italian shares lost 0.7%, paring earlier losses. The country’s biggest banks, which are big holders of Italian debt, led the decliners.
The regional European Stoxx Europe 600 index ended up 0.4% after a volatile session.
The euro was broadly steady at $1.019 against the dollar after initially exiting the ECB rate decision. It had fallen to parity with the greenback last week on concerns about the bloc’s economic outlook. Uncertainties about the eurozone economy and energy supply will continue to weigh on the common currency, according to Deutsche Bank’s chief international strategist Alan Ruskin.
US Treasury yields were significantly lower on Thursday morning, with the biggest moves coming in short-term securities, which are the most sensitive to interest rate policy. The two-year yield fell 0.11 percentage points to 3.12%.
While some weak data has been released that may have triggered the risk-off move, including weekly jobless claims, some analysts warned that the big changes in the price of Treasuries were likely due to the weak liquidity
“The data this morning was unexpectedly bad, but it wasn’t first-rate or even second-rate data,” said Gennadiy Goldberg, an analyst at TD Securities.
“There were a couple of big block trades that happened. I think a lot of that is related to liquidity,” Goldberg said.
Wall Street’s S&P 500 was up 0.4% by mid-afternoon in New York. The tech-heavy Nasdaq Composite was 0.8 percent higher.