Foreign investors shed Italian bonds at record pace

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Foreign investors sold a record €36.8bn of Italian bonds in May and some €38bn in June, recording the highest sell-off since the 2008 crisis, according to the European Central Bank.

These record sales of Italian debt followed the coalition government formed by the Eurosceptic parties the League and Five Stars in May, which sparked concerns on the market over its cooler stance towards the eurozone.

The price of Italy’s government debt dropped sharply today after the country raised €7.75bn in fresh paper at the highest cost in more than four years.

The yield on Italian 10-year debt rose by 12 basis points on the day in Thursday’s trading to 3.236 per cent, its highest level since the initial sell-off in the Italian bond market in late May. Italy’s risk premium rose to 280.5 basis points over the past year.

Yields on Italian government debt have been rising since the Eurosceptic parties Five Start and the League formed a coalition government in late May.

Market is now expectant to the resumption of talks next month on the government’s first budget, which could see the executive hiking public spending in a defiance to Brussels.

Mark Dowding, co-head of Developed Markets at BlueBay AM, said: “What is clear in the interim is that foreign ownership of Italian government bonds (BTPs) is very low, there is a lot of bearishness with respect to budget discussion and with BTP bond futures having been used as a tool to hedge risk, the market will be just as vulnerable to squeezing tighter on no news – as it is vulnerable to spread widening.”