Borrowing costs in France and Italy hit highest levels in a decade

France's 10-year yield hit a 12-year high of 3.5% on Thursday, while Italian equivalents hit 10 -year level. the annual maximum is 4.89%. Photo: Yara Nardi/Reuters

Government borrowing costs in Britain and the eurozone have risen sharply on concerns about large deficits and higher rates over longer periods.

Eurozone government borrowing costs have reached their highest levels. in more than 10 years on Thursday amid market concerns about rising government borrowing in France and Italy.

UK 10-year yields recorded their biggest daily jump since February, peaking at 4.54 on Thursday % — levels seen since last year's mini-budget.

French 10-year yields hit a 12-year high of 3.5% on Thursday, while Italian equivalents hit a 10-year high in 4.89%.

Jumps in yields also followed France's budget proposals. announced on Wednesday, which included plans to reduce the deficit from 4.9% of gross domestic product to 4.4%, still well above the EU rule of 3%. The French financial regulator has criticized the lack of structural spending cuts.

The Italian government just softened its debt targets and said it was lowering economic growth expectations.

In Germany, the 10-year yield, the euro zone benchmark, rose to 2.93%, its highest level in more than 10 years. In Spain, yields topped 4% for the first time in a decade.

2104 Eurozone money supply

Andrew Kenningham, chief European economist at Capital Economics, said higher oil prices could also weigh on investor rates.

“This may contribute to the view that inflation will not fall too quickly,” Mr. Kenningham said.

He added: “There has definitely been a change in the dominant narrative. Investors expect central bank rates to remain high for a long time.»

U.S. Federal Reserve communications last week emphasized holding rates.

Althea Spinozzi, senior fixed income strategist earnings at Saxo Bank, said: “People are starting to realize that the ECB, as well as the Federal Reserve, will keep rates higher for longer.”

Analysts agree that the European Central Bank will not start cutting rates until next spring. Capital Economics forecasts there will be no rate cuts for 12 months.

“We think the ECB will be very reluctant to take its foot off the brake because even if inflation falls quite quickly, which I think it will and will do it.

Economic prospects are becoming increasingly unstable. The difference between Italian and German gold bond yields has widened to almost two percentage points, the widest gap since March, when the US banking crisis sparked worries in markets across Europe.

This could create new problems for the ECB. because it means higher interest rates have an uneven impact on the eurozone economy, Ms. Spinozzi warned.

“That's one of the downsides of having a monetary union. This is also potentially a problem for Italy in terms of its debt dynamics. If they have to pay more to borrow, they will have to grow their economy much faster or run bigger deficits,” Mr. Kenningham said.