LONDON: Italian government bond yields hit a seven-week high on Thursday after studies suggested that the Omicron coronavirus variant is milder than earlier versions of COVID-19, a boost for economic prospects and for monetary hawks.
The potential switch of roles for Mario Draghi from prime minister to president of Italy, and potential parliamentary elections, may also be weighing on the bonds.
While experts warned that research on the Omicron variant is still at an early stage, a South African study suggests reduced risks of hospitalisation and severe disease in people infected with the variant versus the Delta variant.
Demand for government bonds tends to drop on any improvement in sentiment, as it reduces the need for further monetary stimulus that usually comes in the shape of bond purchases and lower rates for longer.
Italy is seen as one of the biggest beneficiaries of European Central Bank largesse, and is vulnerable to any sign of tightening policy as a result.
“Rates are likely to reprice higher in 2022 led by the United States on the back of strong growth and inflation, and the start of a proper hiking cycle,” analysts at BofA Securities said in a note.
They said this will be driven by slowing but still above-trend growth and inflation and US Federal Reserve policy tightening via rate hikes and quantitative tightening signals.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits held below pre-pandemic levels, while US consumer confidence improved further in December, suggesting the economy would continue to expand in 2022.
Euro zone bond yields were up across the board on Thursday, led by Italian 10-year borrowing costs, which hit a seven-week high of 1.146%. By 1611 GMT they were up 6.1 basis points (bps) on the day at 1.117%.
Potential general elections Italy in 2023 will trigger a fierce political campaign, which could hurt Italian debt, particularly without Draghi directly influencing policy, analysts said.
“With polls projecting a substantial draw, parliamentary elections held in late spring could open a new period of political uncertainty,” Berenberg analysts said.
German 10-year Bund yields, the benchmark for the bloc, were up 5.0 bps at -0.243%; well away from the -0.40% low hit at the start of the week on Omicron pessimism. The equivalent French and Spanish yields were also up around 5 bps.
A money markets gauge of long term euro zone inflation expectations, the five-year forward inflation swap was at 1.9471%, after it closed Wednesday at 1.9694%, its highest since mid-November.