Italy's borrowing costs rose on Friday, pushed up by further signs of weakness in the Italian economy and a selloff in world stocks that took the shine off an otherwise stellar week for the bond market. In broader euro zone bond markets, yields edged higher after heavy falls this week, but the selling in higher-rated fixed income was tepid as concerns about a US government shutdown and further US rate increases rattled world stock markets.
In Italy, short-dated bond yields rose as much as 10 basis points in the wake of data showed morale amongst Italian businesses and consumers both fell in December and signalled growing gloom in the euro zone's third largest economy. "There's a risk off tone to markets today but economic data is also weak," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London, referring to the rise in Italian yields.
"The weak confidence numbers together with the recent weak PMIs (purchasing managers index), suggest there is a good chance that Italy has slipped into recession." Italy's two-year bond yield closed the day up 12 bps on the day at 0.55 percent, above almost seven-month lows hit this week in the wake of a budget deal with the European Union.
Italian 10-year bond yields were set for a fifth straight week of weekly declines but were 9 bps higher on Friday at 2.83 percent. European stock markets edged lower, while oil prices slid over 4 percent overnight, adding to the selloff in Italian assets - viewed as relatively risky compared with euro zone rivals.
Sentiment had turned sour after Wednesday's US Federal Reserve decision to largely retain plans to lift interest rates in the face of mounting risks to growth. Markets were also unsettled when US President Donald Trump refused to sign legislation to fund the US government unless he got money for a border wall, thus risking a partial federal shutdown on Saturday.
Germany's benchmark 10-year Bund yield was marginally higher on the day at 0.25 percent - not far off almost seven-month lows hit the previous session at 0.20 percent. In recent months, German and Italian bond yields have moved in the opposite direction.
However, while Italian bond yields have fallen around 10-15 bps this week as markets cheered an EU/Italian budget deal that means Italy avoids disciplinary action for its budget plans, German bond yields are set to end the week 1.5 bps lower. That suggests safe-haven German bonds continue to draw support from the selloff in world stocks.
"Given the string of ongoing negative surprises in business sentiment releases, the chance of a powerful rebound (in German Bund yields) appears limited as we head into the final trading days of the year," analysts at UniCredit said in a note.
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