Italian government bonds recover after volatile session, spread narrows to 114.6 points
Italian government bonds staged a recovery after a turbulent morning session that saw the yield spread touch a six-month high. The differential between the 10-year Btp and the German Bund closed at 114.6 basis points, down from 126 points at the opening bell. The yield on the benchmark Italian bond settled at 4.6%, shedding 8.6 basis points on the day.
The turnaround came as pressure eased on government bond markets across Europe. Yields on 10-year bonds in the region's major economies fell by approximately three basis points. The German Bund dropped eight basis points to 3.42%, while the French Oat slipped three to 4.88%. British Gilts and US T-Bonds also moved lower.
The catalyst for the shift across markets arrived from Washington. US employers created 29,000 jobs in September, a fraction of the 90,000 forecast by economists. The unemployment rate rose unexpectedly to 4.2% from 4.1%. The data signalled a cooling labour market, prompting traders to reduce bets on further interest rate increases by the US Federal Reserve at its policy meeting later this month.
What the US jobs data means for borrowers in Italy
The weak US employment figures triggered an immediate repricing of Federal Reserve expectations. According to the CME Group FedWatch Tool, the probability that the central bank will hold rates steady at its October meeting rose to 72% and then to 82.8%. The T-Bond yield fell more than six basis points to 5.182%.
The ripple effect reached European markets and contained the damage from a morning spike that saw the Btp-Bund spread briefly touch 131 points. A narrower spread reduces the premium Italy pays to borrow compared to Germany. For households and businesses, a lower yield environment offers some respite from rising borrowing costs on mortgages and corporate debt, though rates remain elevated by historical standards.
Inflation surge complicates the picture for the European Central Bank
While the US data pointed toward an economic slowdown, the outlook in Europe faces a different challenge. Eurozone inflation jumped to 3.8% in September, up from 3.2% in August, according to preliminary estimates from the statistical office of the European Union, Eurostat. Energy prices drove the acceleration, rising 18.8% on the year.
The reading complicates the task of the European Central Bank, which is based in Frankfurt. The ECB has already raised rates this year in response to price pressures. An inflation rate nearly double its 2% target strengthens the argument for tighter monetary policy, even as growth slows. Analysts note that further rate hikes would increase borrowing costs for Italian households and companies holding variable-rate loans.
Diego Iscaro, head of European economic analysis at S&P Global Market Intelligence, noted that the economy had shown resilience to energy shocks, but said rising inflation would test that strength entering the final quarter.
Government calls for EU flexibility on spending rules
Italian officials responded to the market volatility with calls for prudence and flexibility in equal measure. Economy Minister Giancarlo Giorgetti said he was monitoring both rates and inflation with close attention. He argued that the spending targets set for national governments three years ago, under different inflation expectations, must now account for the impact of higher prices on nominal spending paths.
Foreign Minister and Deputy Prime Minister Antonio Tajani expressed hope that ECB policymakers would recognize the current inflation as an external shock rather than a domestically generated issue. "I hope that in Frankfurt they put a hand on their conscience and realize that the inflation today is exogenous, not endogenous," Tajani told reporters.
The government has secured approximately €28 billion in flexibility from the European Commission for the 2027-2028 period, earmarked for defence and energy spending. Giorgetti confirmed the administration is pursuing a "more prudent" budget strategy while seeking to protect strategic investments.
