Southern European borrowing costs rise as spotlight turns to EU meeting

Southern European bond yields rose to near one-month highs on Monday, a sign of investors' unease ahead of a European Union summit later this week over how to tackle the economic fallout from the coronavirus crisis.

Portugal's 10-year borrowing costs hit one-month highs after Fitch Ratings on Friday downgraded the country's ratings outlook to stable, from positive, saying that its tourism-driven economy was particularly exposed to the pandemic's downside risks.

Spain's 10-year bond yields also rose to its highest in a month; Italy's borrowing costs neared one-month highs.

Selling pressure on Italian government bonds has returned in the past week, undoing some of the benefits of the European Central Bank's massive bond-buying scheme, after euro zone politicians failed to agree to common debt issuance as a means of addressing the crisis.

Italian Prime Minister Guiseppe Conte used an interview with Germany's Sueddeutsche Zeitung on Monday to repeat calls for the European Union to issue common euro zone bonds to demonstrate the bloc's solidarity in the face of a pandemic that is likely to trigger the worst recession in years.

Europe will need at least another 500 billion euros from EU institutions to finance its economic recovery, on top of the agreed half-a-trillion package, the head of the euro zone bailout fund, Klaus Regling, said.

Lyn Graham-Taylor, fixed income strategist at Rabobank, said that he was positioned for a sell-off in peripheral bonds after Thursday's meeting because the euro zone would not be able to share debt costs.

"If there's a big number announced the market will just rally just because it wants there to be a positive development," he said. "But...everything at the moment suggests it's going to be difficult for there to be something akin to mutualisation of liabilities."

The ECB tend to be forced into action by market pressure, he said, and it would take the spread between Italian and German 10-year yields to widen by a further 50 to 60 basis points before the meeting for a significant cost-sharing announcement to be made.

Yields across the Italian curve were as much as 15 basis points higher on the day. Italy's 10-year bond yield rose to 1.94% - edging back towards one-month highs hit last week. The yield gap over top-rated German Bunds was at 240 bps, around 20 bps wider from Friday's closing levels.

Portuguese and Spanish 10-year bond yields rose to one-month highs at 1.06% and 0.899% respectively.

The Italian bond market faces another test at the end of the week when S&P Global reviews Italy's BBB rating with a negative outlook.

Elsewhere, Germany's benchmark 10-year bond yield was little changed around -0.47%.