Spread rises above 130 points, the wave from French debt reaches Rome

In the afternoon the Btp-Bund spread rose above 130 basis points, with the Italian ten-year yield at 4.67%: an upward revision over the course of the day, not a correction, signalling a further increase in investor caution toward Italian public debt in the final hours of trading.

The movement forms part, according to market data, of a broader flight by investors from French government bonds toward German Bunds, seen as a more solid haven amid contagion fears linked to the risks of French debt. At the same time, yields on French and British government bonds hit decades-long highs, against a general backdrop of selling in bond markets. The sources consulted do not specify the exact level reached by French and British yields, limiting themselves to describing them as at decades-long highs.

The mechanism described by the sources is consistent: investors are moving capital away from bonds considered riskier — French debt foremost among them — toward those perceived as more solid, namely German government bonds. The German Bund, as the safety benchmark for the euro area, is seeing demand increase; as a result its yield falls, and the differential compared with bonds from other countries, Italy included, widens even without any direct selling of Btps.

Italy, while not at the centre of the direct selling flagged by the sources, is affected indirectly. It is not possible, on the basis of the material available, to establish precisely what share of the widening in the Italian spread is directly attributable to the movement in French bonds and what share is instead linked to other market factors not specified in the sources consulted. The two dynamics — the transatlantic one and the one internal to the euro area — are described by the sources as running in parallel, not as a clear-cut cause and effect.

It remains to be seen, in the coming trading days, whether the movement in French bonds stabilises or continues to fuel pressure on government bonds of other euro area countries.