The Italian-German yield spread tends to be the most sensitive in the region to shifts in risk sentiment and ECB policy given Rome’s huge levels of debt. Italian debt “will increasingly be at the mercy of genuine market forces.” “The reality is that we are headed to an end of the pandemic emergency purchase program and a very difficult agreement on what to do with asset purchases thereafter,” said James Athey, investment director at abrdn plc. Italian debt has been among the biggest beneficiaries of the ECB’s 1.85 trillion-euro ($2.14 trillion) bond-buying arsenal, driving the yield on 10-year bonds to a record low earlier this year. The ECB’s outlook - it has signaled a very gradual path to higher rates - leaves it well behind the Bank of England and Federal Reserve, which is about to start tapering purchases this month. Yet with its pandemic bond-buying program ending in March and investors desperate for clarity on the scope of any future purchases, the market remains on edge. The gyrations shows even the most dovish central banks will struggle to sidestep the market fallout as they telegraph an end to ultra-loose policy.

The yield premium over German peers - a key barometer of risk appetite in the euro zone - also surged to a one-year high, only to pull back by the most in nine months. Volatility on Italy’s 10-year bonds leapt to the highest since April 2020 last week after ECB President Christine Lagarde made a half-hearted attempt to push back against markets pricing an interest-rate hike next year. (Bloomberg) - The sharpest swings since the start of the pandemic in one of Europe’s riskiest debt markets is giving investors a taste of what’s at stake if the European Central Bank makes any missteps in withdrawing stimulus.

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