The yield on the 10-year Italian BTP soared to over 3.8% in January, its highest in six months, tracking the surge in bond yields across the globe amid the likelihood that major central banks will react to rising inflation expectations. Soaring natural gas prices in Europe due to the commodity’s uncertain supply triggered warnings that inflation in the Eurozone may be rekindled, potentially forcing the central bank to keep interest rates at a restrictive level and magnifying the pressure on government bonds. Elsewhere, strong labor data from the US aligned with hawkish signals from the FOMC, adding to pressure on debt. The risks of higher borrowing costs especially impact economies with higher risk premiums, lifting the spread between the 10-year BTP and its German counterpart to 125bps, its highest in over one month. This was despite Italy’s new budget targeting a reduced deficit in 2025, which aims to halt the growth in debt-to-GDP by 2027.
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