ROME (Reuters) - The head of Italy’s Debt management Office (DMO) said on Monday she sees prolonged instability for the euro zone bond markets after investors were unsettled by the statements of the U.S. Federal Reserve’s president last week.
“I do not expect markets to come back to stability in the short term as the economy of the whole euro zone is in dire straits and market analysts are paying much more attention to the real economy,” said Maria Cannata, head of Italy’s DMO.
Rome is expected to put on sale at least 15 billion euros ($19.7 billion) of bills and bonds in the next three days for its end-month debt auctions as it pushes ahead to meet a 450-billion-euro refunding target for this year.
After a 10-month-long rally, bonds of peripheral euro zone countries have been under heavy selling pressure since the end of May because of investors’ concerns the Fed would reduce its ultra-loose monetary policy by the end of the year, cutting the liquidity that fuelled risky assets purchases.
The U.S. central bank confirmed last week it could start reducing the speed at which it prints new money before the end of 2013, pushing Italian borrowing costs dramatically up even if the Fed pledged to stick to current rates for long.
“Markets overreacted to the statements of the Fed’s (president),” said Cannata, speaking at a conference in Rome.
She said investors were now taking for granted a rise in U.S. interest rates by the end of this year but this was an overreaction.
“The reaction was stronger than what one could have expected looking at the Fed’s statement,” she said.
Fed Chairman Ben Bernanke said on Wednesday the U.S. economy was expanding strongly enough for the central bank to begin slowing the pace of its bond-buying later this year.
Bernanke stressed that a slower pace of bond buying would still be adding support to the economy, and that any decision to begin removing stimulus remained a long ways off. Any eventual increases in interest rates would also be gradual, he added.
($1 = 0.7612 euros)
Reporting by Giuseppe Fonte; writing by Francesca Landini; editing by Ron Askew