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Italian bonds sell off after EU warning on government's spending plans

Italian government bonds sold off Oct. 8 after the European Commission issued a warning to Italy's governing coalition over its budget plans for the next three years.

Valdis Dombrovskis, the commission's vice president for the euro and in charge of financial stability, and Pierre Moscovici, the commissioner for economic and financial affairs, said in an Oct. 5 letter to Italian Economy Minister Giovanni Tria that the Italian government's budgetary targets "point to a significant deviation" from fiscal recommendations adopted in July by the European Union's finance ministers.

Italy is targeting headline deficits of 2.4% of GDP in 2019, 2.1% in 2020 and 1.8% in 2021. The budget targets also correspond to a structural deterioration of 0.8% of Italy's GDP in 2019 and a stable structural balance in the next two years.

"This is therefore a source of serious concern," Dombrovskis and Moscovici said in the letter. The yield on 10-year Italian bonds rose nearly 20 basis points to 3.602% as of 10:57 a.m. Milan time, while the yield on two-year bonds was up 26 basis points to 1.589%.

The benchmark Italian FTSE MIB index also slipped 2.06% as of 10:39 a.m., with shares in UniCredit SpA down 3.27%, Intesa Sanpaolo SpA down 3.50% and Banco BPM SpA plunging 6.24%. Banca Monte dei Paschi di Siena SpA shares were down 4.76%.

Although Italy's proposed budget deficit of 2.4% of GDP for 2019 is below the EU's threshold of 3%, the country is required to reduce spending to cut its debt levels, currently the second-highest in the eurozone, behind Greece.