Italy’s bond yields rise on political uncertainty; Powell eyed

MILAN — Italy’s government bonds underperformed their euro zone peers on Tuesday on growing political uncertainty as markets remained focused on the path of U.S. monetary policy normalization and surging inflation.

The Italian Parliament will convene to choose a new president this month with Premier Mario Draghi seen as the leading candidate.

Investors fretted about the country’s political stability should the former European Central Bank chief leave his job as prime minister and assume the presidency.

By 0830 GMT, Italy’s 10-year bond yield was up almost 4 basis points at 1.39%, its highest level since June 2020. .

“Uncertainty over the Italian Presidential election as well as its implications for government stability and the reform agenda is rising,” wrote Carlo Capuano, Vice President, Global Sovereign Ratings at DBRS Morningstar.

More generally, investors’ bets that the Federal Reserve could lift interest rates as early as March ignited a robust sell-off on bond markets in the last few weeks before a key U.S. December inflation reading due on Wednesday.

A Reuters poll predicts consumer prices rose 7% year-on-year.

In comments prepared for delivery at a congressional hearing later in the day, Fed Chair Jerome Powell pledged “to prevent higher inflation from becoming entrenched.”

Some of Wall Street’s biggest banks now expect four U.S. interest increases this year starting in March, a more aggressive call than a week ago.

“U.S. rates should once again set the tone in global fixed income markets. Powell’s hearing will be an opportunity to gauge the aggressiveness of the Fed’s tightening cycle, and it could see the curve front-load hikes further,” ING strategists wrote in a note to clients.

Germany’s 10-year note yield ticked up at -0.032% having risen on Monday as far as -0.025%, its highest level since May 2019, and not far from positive territory.

Elsewhere, Switzerland’s 10-year bond yield held in positive territory after rising above 0% last week for the first time since late October.

On the other side of the Atlantic as well, investors focused on the outlook for euro zone inflation after the December reading unexpectedly rose to a record high of 5% before a speech by European Central Bank President Christine Lagarde.

In an interview with Italian daily Il Sole 24 Ore, the European Central Bank’s chief economist Philip Lane said on Tuesday the ECB does not see euro zone inflation above its 2% target in the medium term.

Furthermore, Spain kicked off on Tuesday the sale of a new 10-year bond via syndication with a size in the 8-10 billion euros ($90.69 billion) range, according to Mizuho strategists. ($1 = 0.8821 euros) (Reporting by Sara Rossi; editing by Saikat Chatterjee and Ed Osmond)