Research Center
Cyprus Economy

FINANCE: Cyprus bond yields increase as Italy stutters

11 October, 2018

Monetary policy changes in Europe, uncertainty over Italy’s fiscal plans and the trade war between the USA and China have triggered an increase in yields of Cypriot and other Eurozone bonds.

While uncertainty over the approval of Italy's budget may fuel a broader crisis within the EU, the bloc will see the end of the low interest rate period at the end of the year, when the ECB's bond purchase program comes to a close.

Italians are insisting on a budget deficit of 2.4% of GDP in 2019, roughly twice as much as the country needs to achieve a gradual reduction of public debt it has accumulated which now stands at 130% of Italy’s GDP.

The policy of the Italian government - a coalition of politicians from populist parties - is causing turbulence in international markets.

Italy's ten-year bond yield reached 3.6% from 3.3% on 3 October, while Spain's 10-year bond yield reached 1.6% from 1.5% and Greece’s 10-year bonds now offer a yield of 4.5% from 4.4%.

The Cypriot bond market cannot but be affected by the developments in Italy, with the return on bonds maturing in 2025 is 1.72% from 1.57%.

Talking to the Financial Mirror, Yiannis Tirkides, the Economic Research Manager of Bank of Cyprus’ Finance Division, said that the main reason behind the increase of yields offered by bonds issued by a number of Eurozone countries is “mainly caused by the continued accumulation of debt and the reversal of monetary policy in Europe and the USA”.

He noted that the federal bank of the United States began a cycle of increasing interest rates back in December 2016, while in Europe, the ECB will end the quantitative easing program at the end of this year and is expected to start raising its interest rates by the end of 2019.

“If we add to all of these uncertainties related to Italy and the trade war between the United States and China, what is being created is the rising market risk. This will inevitably be gradually reflected in bond yields that are rising," Tirkides said.

He said this is a trend that will continue gradually over the next period and will certainly take its toll on Cyprus.