Italian bond yields surged on Friday after the ECB made a statement on the meeting that could potentially imply reduced support for the EU bond markets.

The ECB left interest rate and QE size unchanged in line with market consensus, however what surprised market participants is that the central bank stressed that it isn’t necessary to use all funds under the Emergency Asset Purchase Program (PEPP) of 1.85 trillion euros.

Following the announcement, government bond yields in Italy and Spain rose sharply, advancing to the highest level since November.

On Friday, the yield on 10-year Italian government bonds rose 4 basis points to 0.7%. For Spanish bonds with the same maturity, the yield gained 2 basis points, rising to 0.15%.
The spread between Italian and German bond yields widened to the highest level since mid-November to 119 basis points.

Investors could start to reduce their holdings in European bonds as without proper support from the ECB bond markets could face with reduction of demand and hence rising risk of downside movements in price.

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