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Italian stocks rallied and government bond yields crept still lower, as the European Central Bank pledged new support for the eurozone’s fragile Southern economies.
The yield on the 10-year Italian government bond was recently at 3.775%, compared with around 3.8% before the announcement. On Tuesday, Italy’s benchmark borrowing cost hit 4.19%, which marked the highest level since 2013. Bond yields fall as prices rise.
Italy’s benchmark FTSE MIB stock index was one of the Europe’s best performers, rising 2.8%. Italian bank stocks surged. FinecoBank rose 7.1%, while UniCredit gained 4.8%. Intesa Sanpaolo was up 5.3%.
A key measure of financial stress in the eurozone—the difference between the yield on the 10-year benchmark German government bond and its Italian equivalent—narrowed to 2.15 percentage points, from 2.4 percentage points Tuesday. That spread had risen to the highest level since 2020 in recent days.
The market relief came after the ECB announced plans to address the recent surge in borrowing costs for southern European economies. The ECB said it planned to reinvest with “flexibility” the proceeds of bonds redeemed under its emergency pandemic bond-buying program, known as PEPP.
Seamus Mac Gorain, head of global rates at J.P. Morgan Asset Management, estimated that could equate to around 200 billion euros—equivalent to $208 billion—worth of additional bond purchases this year. These would be targeted at struggling economies like Italy.
“It is incrementally helpful but I don’t think it’s large enough to change the situation,” he said.
The ECB also said it would begin work on a broader tool to address fragmentation risks within the bloc, though it didn’t 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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