Italian-German yield gap narrows on bank clean-up efforts
The premium Italy pays to borrow in bond markets over Germany fell to its lowest in over a month on Tuesday as UniCredit announced the country’s biggest ever share sale in the latest bid to clean up its banking sector.Italy’s largest bank said it would raise 13 billion euros to bolster its balance sheet and boost longer-term profitability, while the government looks to be preparing to pump capital into Monte dei Paschi, which is struggling to raise money privately.
The fate of Italy’s financial sector is intrinsically tied to its government because banks are some of the biggest investors in their country’s bonds.
New Prime Minister Paolo Gentiloni unveiled an almost unchanged cabinet on Monday, which analysts said was welcomed by investors shaken by the political upheaval of a constitutional referendum that unseated ex-premier Matteo Renzi.
“The markets appear to be taking the developments in the banking sector quite positively and the cabinet chosen by Gentiloni has reassured investors,” DZ Bank strategist Christian Lenk said.
Italy’s new government will face confidence votes in both houses of parliament this week. The small centre-right ALA party that supported Renzi said it might not back the new government, raising doubts over whether Gentiloni will have the numbers in parliament to form a majority.
Italian 10-year government bond yields fell 6 basis points to 1.94 percent, narrowing the gap with German equivalents to 155 basis points – its tightest since early November, according to Tradeweb data.
German equivalents fell 2 bps to 0.39 percent, while most other euro zone yields edged 2-5 bps lower.
Italian banking stocks gained 1.3 percent, hauled up by a near 4 percent rise in UniCredit shares and a 2 percent gain in Monte dei Paschi’s stock.
“The uncertainty of a major government reshuffling has been removed and investors appear to be cheering developments in the banking sector as well,” Commerzbank strategist David Schnautz said.
At the auctions, Austria will issue 1.1 billion euros in bonds by reopening 2026 and 2025 debt.
