FX.co ★ Italy's BTP Yield Pulls Back From 3-Year High

Italy’s 10-year BTP yield slipped below 4.7%, retreating from a three-year high, as traders weighed stubbornly high inflation against the euro area’s fiscal outlook. Eurozone inflation climbed to its highest level in three years, in line with expectations, reinforcing market expectations of a third ECB rate hike by year-end.

At the same time, growing concerns about debt sustainability and higher public spending—partly driven by elevated energy costs in heavily indebted member states—have led markets to scale back expectations for ECB tightening next year to two or three hikes, down from four previously.

Italy’s budget deficit for 2025 was confirmed at 3.1% of GDP, above the EU’s Excessive Deficit Procedure (EDP) threshold, even as the government aims to narrow the gap. Reports suggest Rome is considering cutting defense spending to 0.6% of GDP from 0.9%, with formal confirmation expected later on Friday.

Such a move could help ease investor concerns that have driven Italian yields to multi‑year highs. On October 1, the spread between Italian BTPs and safe-haven German Bunds posted its largest one-day increase since 2020.