Italian bond yields suffered a big intraday spike today after a European Central Bank (ECB) council member suggested monetary policy was at its limits amid the coronavirus outbreak.
Yields on Italy’s 10-year bond shot up as much as 60 basis points (0.6 percentage points) to touch three per cent before falling back to around 2.296 per cent.
The yield moves inversely to a bond’s price, with rising yields a sign of lower demand for a government’s debt due to economic stress. Italian bond yields cooled off after reports said the Bank of Italy would step into the market.
Other Eurozone bond yields also jumped, with Italy’s fellow “periphery” nations such as Greece and Portugal seeing sharp price falls and even the ultra-safe 10-year German Bund yield rising to a two-month high before dipping again.
The bond sell-off was triggered by comments from Austrian central bank boss Robert Holzmann, who suggested monetary policy could go no further to support economies and could not meet the market’s expectations.
Holzmann later rowed back on his comments after a rare public slap-down from the ECB. He said the central bank “has by no means” reached its limits.
Jack Allen-Reynolds, senior Europe economist at Capital Economics, said: “It’s another unforced communications blunder from the ECB.”
Last week, markets reacted badly when ECB said the central bank is “not here to close [bond] spreads” – the difference in price between Eurozone members’ bonds, which is an indication of the stress countries are under.
Markets read the comments as a sign the Bank might not do “whatever it takes” to support certain Eurozone economies as it did eight years ago. Many defended Lagarde’s comments, however, saying they were meant to encourage Eurozone governments to do more to tackle the economic effects of coronavirus.
Yields in Europe and around the world were also driven higher by a sell-off in the bond markets as investors flee towards the dollar.
The 10-year US Treasury yield was surged as much as 20 basis points before falling back somewhat to stand at around 1.1 per cent. UK 10-year yields jumped to around 0.713 per cent.
Ranko Berich, head of market analysis at Monex Europe, said the dollar is “is proving unstoppable as global financial markets stare into the abyss of crisis-like conditions”.
As most financial and trade transactions are conducted in dollars, demand is always high and so the currency is unlikely to lose value, making it a desired asset at times of severe economic stress.
The US Federal Reserve has done its best to ease the strain in equities, bond and short-term lending markets by slashing rates and pumping money into the system.
However, the likely extent of the economic fallout from coronavirus is causing investors to exit their positions across a range of markets.