Global bond market review: Italian bond yields rise

Government bond yields in Italy rose sharply during February as a decline in confidence pushed up borrowing costs. Sentiment was knocked by a combination of factors, including a negative assessment of the country’s economy by the European Commission.

  • Fitch affirmed Italy’s credit rating at “BBB” with a “negative” outlook
  • Confidence picked up in France
  • Demand for fixed income funds picked up in January

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Government bond yields in Italy rose sharply during February as a decline in confidence pushed up borrowing costs. Sentiment was knocked by a combination of factors, including a negative assessment of the country’s economy by the European Commission (EC). The EC criticised Italy’s economy, highlighting the country’s high public debt as a “major vulnerability” and urging the country’s leaders to tackle economic imbalances.  In a debt auction at the end of February, the yield on a new ten-year government bond was set at 2.81%; in comparison, an auction of ten-year bonds in January resulted in a yield of 2.60%. The yield on the benchmark Italian government bond rose from 2.49% to 2.68% over February. 

“Corporate bond quality has undergone a prolonged decline, according to a study by the OECD”

Credit ratings agency Fitch affirmed Italy’s credit rating at “BBB” with a “negative” outlook that reflected “the extremely high level of general government debt and the absence of structural fiscal adjustment … and uncertainty arising from the current political dynamic”.

France’s benchmark government bond yield fell to its lowest level since the end of 2016 as the impact of the “gilets jaunes” protests receded. President Macron’s stimulus measures helped to provide a boost for consumer confidence, which rebounded to pre-protest levels. Over February as a whole, the benchmark French government bond yield fell from 0.53% to 0.49%.

Corporate bond quality has undergone a prolonged decline, according to a study by the OECD. The global corporate bond rating index has remained below “BBB+” for nine straight years, representing the longest period of sub-BBB+ rating since 1980. The OECD warned that this protracted deterioration in bond quality could result in relatively high default rates in the event of an economic downturn, triggering an increase in the number of “fallen angels” (bonds that are downgraded from investment grade to non-investment grade). As the non-investment grade market is relatively illiquid, this could put pressure on investors whose mandates prohibit their investment in non-investment grade issues. 

Demand for fixed income funds improved during January, according to the Investment Association (IA), and the best-selling IA sector was £ Strategic Bond. Meanwhile, the Global Bond sector notched up two consecutive months of positive net retail inflows for the first time since May 2018. In contrast, the £ Corporate Bond sector was one of the least popular during the month, registering net retail outflows of over £490 million. 


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