Italian bonds rally amid concerns on Fed rate hikes

ROME, Aug. 29 (Xinhua) -- Bond yields in Italy surged to their highest levels in weeks on Monday as potential changes in the monetary policy of the United States Federal Reserve (Fed) and concerns about Italy's upcoming elections combined with macroeconomic and environmental factors unsettled investors.

At the end of trading on Monday, the yield on Italy's benchmark ten-year bonds stood at 3.795 percent, after rising to 3.882 percent early in the session. Monday's close -- a 3.2 percent increase over Friday's close -- was the highest since the yield surpassed the 4 percent threshold in mid-June.

One of the factors driving interest rates higher around the globe was a comment on Friday from Fed Chair Jerome Powell that the U.S. would continue raising interest rates to tame high inflation. Powell's comment sent stocks lower in New York, but it came too late in the day to have a full impact on the European markets.

The delayed effect on markets was particularly pronounced in Italy, as evidenced by the spread -- a measure of the gap between yields on Italian and German bonds -- growing in Monday's trading session to over 232 basis points.

Shares on the Italian Stock Exchange, which retreated strongly following Powell's comments, added to their losses on Monday, with the main blue-chip index losing a quarter of a percent after being down nearly 1 percent early in the session.

According to Javier Noriega, an economist with investment bank Hildebrandt and Ferrar in Milan, political uncertainty in Italy was a factor in the oversized impact on Italian markets.

"Powell's comments rattled most markets, but Italy has important elections coming up and its economic recovery is already seen as fragile due to rising energy costs, inflation and the summer drought that is reducing agricultural output," Noriega told Xinhua.

Higher bond yields, which mean the government must pay investors higher interest rates to buy its debt, are a reflection of investor nervousness about a specific market.

Italy is scheduled to hold general elections in September. The government is now headed in a caretaker capacity by Mario Draghi, who formally stepped down as head of a broad unity government after his coalition splintered last month.

High energy prices sparked by the conflict between Russia and Ukraine have pushed prices to record highs in Italy. The annualized inflation rate of 8 percent in June was the highest in Italy since 1986, and it dipped only slightly, to 7.9 percent, in July.