Italian assets slump over budget standoff


A slump in Italian assets deepened after a tug-of-war between the government and the European Union over its budget intensified.
Yields on benchmark 10-year bonds rose above 3.5 percent for the first time in four years while stocks approached a bear market after the European Commission said the populist coalition’s plans for a wider deficit are in breach of common rules. German bonds and the yen rallied as investors sought the safest assets.
In a letter to Italian Finance Minister Giovanni Tria, EU Commissioners Valdis Dombrovskis and Pierre Moscovici pointed to a “significant deviation” of budget targets from the fiscal path in a reference to the planned 2.4 percent budget-deficit target. Deputy Prime Minister Luigi Di Maio shrugged off the criticism, saying his anti-austerity view will grow stronger across the continent.
Italian bonds have been pummelled since the budget deficit was announced September 27, with full proposals due to be handed over to the European Commission for review on October 15. Investors are now considering the potential for ratings downgrades, with S&P Global Ratings and Moody’s Investors Service due to review the sovereign before the end of the month. “The Italians are continuing to test the EU’s resolve,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S. “If neither the EU or Italy back down, yields will continue to climb higher from here. But I expect that Italy and the EU will find a compromise, even though it looks difficult at the moment.”
The yield on 10-year bonds climbed 16 basis points to 3.59 percent in London, after touching 3.63 percent, the highest since February 2014. The spread over those on German bonds climbed 20 basis points to 306 basis points. Two-year yields jumped 22 basis points to 1.57 percent.
Local stocks fell for a third day, with the FTSE-MIB Index of shares sliding as much as 2.5 percent to the lowest level since April 2017.

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