LONDON Dec 21 Spanish government bond yields
hit five-week lows on Wednesday as investors shifted money out
of similiarly rated Italian debt where bank bailouts and
political uncertainty have made what ING strategists called a
The gap between yields on Spanish and Italian 10-year debt
nudged back above 50 basis points (bps), a level last breached
in the days after a failed constitutional reform vote triggered
the resignation of Italian prime minister Matteo Renzi.
While Renzi plots his path back to power, possibly in an
election that could come as early as next year, his successor
Paolo Gentiloni is trying to get a grip on the ailing banking
The most immediate concern is Italy's third-largest lender
Monte dei Paschi which seems destined for state aid as a private
recapitalisation flags. The government is expected to seek
parliamentary approval for 20 billion euros of extra borrowing
powers on Wednesday.
Strategists at ING said the combination of possible snap
elections next year and higher bond issuance to prop up Italy's
ailing banks "arguably make for a dangerous cocktail" for
Italian bonds in 2017.
A trend that should only help neighbouring Spain where a
fragile minority government has managed to keep recovery from a
deep recession on track.
"Given that Italy's banking sector is in the headlines at
the moment, investors would appear to be giving preference in
the periphery segment to the Iberian peninsula," DZ Bank
strategist Sebastian Fellechner said.
Spain's 10-year bond yields fell as much as 3 bps on
Wednesday to hit 1.31 percent, the lowest since
Most other euro zone yields were also lower on the day,
But the premium Italy pays to borrow over Spain and
benchmark euro zone borrower Germany has risen
over 10 bps over the past week.
Shares in Monte dei Paschi plunged 8 percent on
Wednesday after a document on its website showed Italy's third
largest lender could run out of liquidity after four months.
Monte dei Paschi has raised about 500 million euros as of
Tuesday in a voluntary debt-to-equity offer that is a key part
of a last-ditch attempt to raise 5 billion and avert state
intervention, a source close to the matter said.
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(Editing by Louise Ireland)