EU warning on 2014 budget lifts Italian yields

Marius Zaharia and Emelia Sithole-Matarise
Friday, 15 Nov 2013 | 11:44 AM ET

* EU Commission warns Italy over budget, yields rise

* Bunds stabilise after hefty central bank-driven gains

* Irish bonds stable as country not looking for new backstop

LONDON, Nov 15 (Reuters) - Italian bond yields rose on Friday after the EU Commission warned the country's draft budget for next year risked breaking the rules, bringing the focus back to Italy's debt problems.

The commission said Finland, Malta and Luxembourg were also at risk of contravening the rules, while Spain, the Netherlands, Slovenia and France had no margin for error.

For Italy, which carries a 2 trillion euro debt burden, it is crucial to keep its budget deficit under control, analysts say, and the fragility of its left-right ruling coalition only makes its task harder.

Italian 10-year yields rose 4 basis points to 4.10 percent with the bonds underperforming euro zone peers.

The rise in yields was limited by speculation that the European Central Bank could ease monetary policy further, following a rate cut last week.

"People are focusing today on the fact that they are getting their knuckles rapped and they need to be doing more and potentially down the line the European Commission will take a hard line with these guys," said Alan McQuaid, chief economist at Merrion Stockbrokers.

"But the market is still reasonably favourable towards peripherals given where we are in terms of the comments that have come out of central bankers this week particularly (the Federal Reserve's) Janet Yellen and (ECB's) Peter Praet."

Also capping yields was the reduced debt supply pressure after last week's record sale of inflation-linked bonds.

Italy said on Thursday it would not offer five-year bonds at its usual end-of-the-month auction. Instead, it would offer December 2018 bonds in exchange for some 2015 and 2017 bonds on Monday.

UniCredit rate strategist Luca Cazzulani in Milan said the ECB's stance "should lead to a decrease in credit spreads and to a flattening of the periphery curves up to five years".

"We see the upcoming exchange auction as a good opportunity to extend duration," he added.

Spanish 10-year yields were 2 basis points higher at 4.10 percent, with Madrid planning to sell a new four-year bond next Thursday. It will announce how much it will offer on Monday.


German 10-year yields stabilised around 1.71 percent, but were poised for their seventh weekly fall in the past 10 weeks. Bund futures fell 7 ticks on the day to settle at 141.63, having gained a point in the past two days on signals of loose monetary policy on both sides of the Atlantic.

Appearing before the Senate for her confirmation hearing, Federal Reserve chief nominee Janet Yellen said on Thursday there were "dangers" in ending the Fed's current monetary stimulus too early.

Other euro zone bonds were steady, with markets giving Ireland the nod on its decision not to ask for a precautionary credit line as its current bailout programme ends this year.

"It's not only a sentiment-driven success story. Fundamentals are quite supportive as well," said Emile Cardon, market economist at Rabobank in Utrecht.

Ten-year Irish yields were flat at 3.55 percent, having fallen from levels above 15 percent at the height of the crisis.