UPDATE 1-Italian bond yields soar above 3% as panic grips bond markets

(Updates throughout)

LONDON, March 18 (Reuters) – Italy’s borrowing costs soared on Wednesday and were set for their biggest daily jump since the 2011 euro zone debt crisis, on mounting worries about the country’s debt sustainability as coronavirus wreaks havoc on the economy.

Italy, at the centre of coronavirus outbreak in Europe, saw its 10-year government bond yields more than 60 basis points up at one point, pushing past 3% to its highest level since early last year.

Analysts said the latest spike in bond yields, not just in Italy but across southern European bond markets, was triggered by very poor market liquidity.

Yields on Spanish and Portuguese 10-year bonds jumped over 30 basis points each , while Greek 10-year bond yields shot above 4% and were last up over 50 bps on the day.

“Liquidity has dropped in BTP futures and that is a good proxy for cash markets — that means no one is there to buy or sell BTPS and one point there were no prices,” said Antoine Bouvet, senior rates strategist at ING.

“In Italy, yields are now rising to a point where investors are worried about debt sustainability and possibly euro break up risks.”

Italian bonds in particular were bearing the brunt of selling as investors fretted about the country’s debt sustainability as the economy takes a beating from the impact of the coronavirus outbreak.

The closely-watched gap between Italian and German 10-year borrowing costs spiked to almost 320 bps, the widest since November 2018.

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