Italian government bonds rose on Wednesday as the European Central Bank signaled it was ready to try to shield weaker euro zone countries from rising borrowing costs.
Stocks on Wall Street also rebounded from multi-month lows as investors waited for the Federal Reserve to raise interest rates by the most in nearly 30 years to curb soaring inflation.
The Stoxx Europe 600 rose 1.4%, while its banking sector index rose 2.5%. Intesa Sanpaolo and UniCredit, Italy’s two biggest lenders, rose 4.6 percent and 3.7 percent, respectively.
Yields on Italy’s 10-year bond, which affects government and consumer borrowing costs in the indebted country, fell 0.37 percentage points to 3.8 percent and surged in recent days after the European Central Bank confirmed the end of its bond-buying stimulus program. US cents – about 4.2% below Tuesday’s high. Bond yields fall as prices rise.
The ECB then held an unscheduled meeting on Wednesday to discuss “current market conditions” and pledged to be “flexible” in how it would reinvest bond proceeds from its pandemic emergency purchases.
It also said it would “accelerate the completion of the design of a new anti-secession tool”, referring to a mechanism that could prevent euro zone governments from paying very different financing costs.
Concerns about weaker countries in the euro zone have intensified since last Thursday the European Central Bank confirmed it was ready to raise interest rates in the first such move since 2011 in the face of record inflation.
Edward Park, chief investment officer at Brooks Macdonald, said: “This notion of fragmentation is worrying as monetary policy outcomes differ across countries in the euro zone.”
The gap between Italian and German 10-year bond yields, a measure of financial stress in the euro zone, was 2.17 percentage points after the ECB statement, down from 2.41 percentage points in the previous session.
On Wall Street, the S&P 500 rose 1% ahead of the Federal Reserve’s interest-rate decision meeting later on Wednesday. On Monday, concerns about tighter monetary policy had pushed the S&P into a bear market, typically defined as a 20% drop from recent highs.
The tech-heavy Nasdaq Composite rose 1.8%.
The sell-off earlier this week was driven by Wall Street Journal The Fed is considering raising interest rates by 0.75 percentage point at today’s meeting, which would be its first move of that magnitude since 1994.
“I don’t think it’s necessarily a bad thing,” said Baylee Wakefield, multi-asset fund manager at Aviva Investors, adding that a quick rate hike would build confidence in the central bank’s “credibility” and a chance “to prove they can be flexible. “
U.S. consumer price inflation hit a four-year high of 8.6 percent in May as Russia’s invasion of Ukraine raised fuel and food costs. Money markets are pricing in next year’s federal funds rate at 4%, currently in the 0.75% to 1% range.
The 10-year U.S. Treasury yield fell 0.1 percentage point to 3.38%, still near its highest level since 2011.