Italy Leads Selloff as Trump Concerns Hit Euro Bonds

Italian bond yields hit their highest level in over a year on Friday, bearing the brunt of a broad market selloff as investors took the view that the policies of US President-elect Donald Trump will push up inflation.

Italy, which faces a ratings review, was in focus ahead of a constitutional referendum on Dec. 4 on which Prime Minister Matteo Renzi has staked his political future, Reuters reported.

With Republican Trump’s shock election victory underscoring the rise of anti-establishment sentiment, investors believe the referendum could move Italy’s populist 5-Star Movement closer to power.

Against this backdrop, Italy’s borrowing costs jumped at an auction on Friday. Ten-year bond yields rose more than 13 basis points to 1.99%, their highest since September 2015.

That put them on track for their biggest weekly jump since June 2015, when a sell-off in eurozone bonds was at its peak, and widened the gap over top-rated German Bund yields to 166 bps, its highest since October 2014.

“The Italy spread to Bunds is now comparable to the levels in 2015 when it looked like Greece was really on the cusp of leaving the eurozone,” said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management.

“It’s an ugly reminder for the eurozone of the kind of issues it faces—and we are left wondering at what level will domestic investors step in and support the BTP market.”

Standard & Poor’s is set to review its BBB- rating on Italy, and though analysts do not expect a downgrade, the “stable” outlook could be at risk because of political risk and an ailing banking system.

Friday’s move came in tandem with a broad bond sell-off across the eurozone, with most yields up 3-13 bps at multi-month highs.

Commerzbank analysts raised in a note the possibility of a “Black Friday” for Italian bonds—and though they saw this as unlikely, they recommended investors purchase low-risk German government debt instead.

Concerns that European voters will reject the political mainstream are not confined to Italy, with French bonds among the day’s biggest losers on the possibility that far-right leader Marine Le Pen will mount a stronger bid for the presidency next following Trump’s triumph.

France’s 10-year bond yield rose to its highest since January, hitting a peak of almost 0.80%. It is poised to end the week with a rise of 29 bps, the biggest weekly rise since June 2015.