Investors expect interest rates to rise by 0.75 percentage points

Italian stocks rallied and government bond yields fell further as the European Central Bank pledged fresh support for fragile southern eurozone economies.

The yield on Italian 10-year government bonds was recently at 3.775%, down from around 3.8% before the announcement. On Tuesday, Italy’s benchmark borrowing cost hit 4.19%, the highest level since 2013. Bond yields are falling as prices rise.

Italy’s benchmark FTSE MIB stock index was one of the best performers in Europe, up 2.8%. Italian bank stocks surged. FinecoBank rose 7.1%, while UniCredit gained 4.8%. Intesa Sanpaolo increased by 5.3%.

A key measure of financial stress in the eurozone – the difference between the yield on Germany’s benchmark 10-year government bond and its Italian equivalent – narrowed to 2.15 percentage points from 2.4 percentage points on Tuesday. This gap had reached its highest level since 2020 in recent days.

Market relief came after the ECB announced its intention to address the recent spike in borrowing costs for southern European economies. The ECB said it plans to reinvest with “flexibility” the proceeds of bonds redeemed under its pandemic emergency bond purchase program, known as PEPP.

Seamus Mac Gorain, head of global rates at JP Morgan Asset Management, estimated that this could represent around 200 billion euros, or $208 billion, in additional bond purchases this year. These would be targeted at struggling economies like Italy.

“It’s gradually helping, but I don’t think it’s big enough to change the situation,” he said.

The ECB also said it would start working on a broader tool to address risks of fragmentation within the bloc, although it did not provide details.

The euro, which had risen almost 1% earlier in the day against the dollar, gave up its gains to trade flat.

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