Unease over Italian bank rescue plan bolsters safe-haven bonds

Concerns emerge over size of bailout for Italian banks

A Banca Monte dei Paschi di Siena branch in Rome. The European Central Bank says Banca Monte dei Paschi di Siena needs about €8.8 billion  to bolster its balance sheet, almost twice the amount the Italian lender had sought to raise in a failed capital increase. Photograph: Alessia Pierdomenico/Bloomberg

A Banca Monte dei Paschi di Siena branch in Rome. The European Central Bank says Banca Monte dei Paschi di Siena needs about €8.8 billion to bolster its balance sheet, almost twice the amount the Italian lender had sought to raise in a failed capital increase. Photograph: Alessia Pierdomenico/Bloomberg

 

Top-rated German bond yields fell to multi-week lows on Wednesday as concerns about the strength of a rescue plan for Italian banks pushed investors to the safety of government debt. Germany’s two-year bond yield briefly touched a fresh record low at minus 0.84 per cent, five-year yields fell to their lowest in almost three months at minus 0.57 per cent and 10-year Bund yields hit a seven-week low before pulling back slightly in thin trade.

The German finance ministry expressed concern about Italian plans to rescue the country’s third biggest lender Monte dei Paschi di Siena, saying Rome must stick to European rules.

On Monday, the European Central Bank told the ailing Italian lender that its capital shortfall had risen to €8.8 billion from the €5 billion indicated previously. This raised questions about whether the €20 billion earmarked by the Italian government would be enough to cover the funding requirements of all the country’s banks.

An Italian treasury source told Reuters this week that the amount would be enough, but investors were still concerned, said DZ Bank strategist Andy Cossor. “The latest news about the Italian banking system may well be pushing investors into the safe haven of the Bund market,” he said. “. . . The Italian government is putting aside €20 billion and there are question marks over whether this will be enough. The market would like to have some clarity.”

Germany’s 10-year bond yield fell to 0.18 per cent, its lowest since November 9th, before edging back up to 0.20 per cent by late trade. “Also, good quality safe haven assets are usually in demand at the year end – investors want to close their books with some safe assets in them,” Mr Cossor added.

Italian bond yields also edged lower to 1.83 per cent.

Standard & Poor’s said on Wednesday it did not expect any immediate effect on Italy’s sovereign rating following the government’s decision to set up the €20 billion fund. Highlighting the divergence between the US and Europe, 10-year US treasury yields rose overnight to 2.56 per cent after US consumer confidence hit its highest level in more than 15 years in December. – (Reuters)