By Anna Hirtenstein

Italian government bond yields rose as Europe's finance ministers failed to agree on a collective response to the economic impact of the coronavirus crisis.

The yield on benchmark 10-year debt jumped above 1.7% on Wednesday, from around 1.5% the day before. The spread between this bond and Europe's safest asset, German government debt, widened to more than two percentage points, having been as narrow as 1.6 points on March 26. Italy's shorter-dated bond yields also rose, with the two-year yield up 0.11 percentage point, reflecting a perceived rise in credit risk for the country in the next few years.

Talks between the European Union's finance ministers, known as the Eurogroup, toward a joint economic response to the crisis were suspended after 16 hours. Discussions are scheduled to resume Thursday.

"The market was expecting some kind of agreement at a European level to deal with the economic fallout, but the Eurogroup poured a bit of cold water on that," said Ralf Preusser, global head of rates research at Bank of America Merrill Lynch. "We're seeing a payback in spreads as a result today."

A key roadblock for finance ministers was the issue of common debt. Italy pushed for a commitment for eurozone nations to raise and spend capital as a group, a move historically resisted by Germany and others. Such a commitment is seen as a way for the bloc's most vulnerable countries to access emergency funds without adding to their already-precarious debt piles.

Italy was the first country on the continent to implement a lockdown in response to the coronavirus, forcing businesses to close and people to stay home to reduce the spread of the disease. UniCredit SpA, one of Italy's largest banks, projected that this will result in a 15% contraction in the economy this year.

The country has launched a EUR750 billion ($815 billion) program of bank-loan guarantees and liquidity for businesses and households, equating to more than 40% of the country's gross domestic product last year. Italy is already one of the most indebted countries in Europe, with borrowings stretching above 130% of GDP. The Italian Treasury hasn't yet released a revised bond-issuance schedule since the crisis began, but UniCredit expects this closely watched metric to rise to 167% this year. This could present a problem if the country's cost of borrowing increases and it is left to deal with the blow to its economy largely on its own.

"This is a crisis that's affecting the entire euro area. It's about being a single market, a political bloc," said Luca Cazzulani, a fixed-income strategist at UniCredit. The European Central Bank has responded strongly but investors are watching for signs of political backing as well, he said.

The ECB last month announced a EUR750 billion bond-buying program with the aim of channeling funds to governments in need. This move calmed markets and sent yields on Southern European government debt down. But as questions arise about Europe's cohesion, some investors are dumping Italy's bonds and the yields are ticking up again.

"In a way we're still flying blind, there's still the big unknown cost of this crisis. As things get clearer, the [Italian bond] market might find new trading levels that risk being wider from here," Mr. Preusser said.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

(END) Dow Jones Newswires

April 08, 2020 09:13 ET (13:13 GMT)

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