Italian benchmark bond yield reaches its highest level since 2014

Italy's public debt faced a new sell-off on Tuesday – bringing a key return to levels not seen since 2014 – as investors were worried about budget plans and relations with Brussels.

At the beginning of European transactions, the yield on the country's 10-year sovereign bonds rose 10 basis points to 3.401%. Tuesday's decision marked the fourth increase in as many trading days and allowed the performance to reach its highest level since March 2014.

The spread against German Bunds, which is closely watched by investors as an indicator of the market's appetite for Italian debt, has risen to 3 percentage points, from 2.383 points to Monday and 2.3 points to end of September.

Prices on short-term paper also declined on Tuesday, leading to higher yields. The two-year yield recently increased 6.4 basis points to 1.436%.

Shares traded in Milan also suffered a shock, leaving the FTSE Ebib down 1.4% in morning trading. Italian banks were among the heaviest losses in Europe: UniCredit lost 3.2%, UBI Banca lost 3.7% and Intesa Sanpaolo lost 2.7%.

In the foreign exchange market, the euro lost 1.18% against the dollar to reach 1.151 dollar, after falling for five consecutive sessions.

Italy shook markets towards the end of last week by unveiling a budget proposal that would result in a deficit of 2.4% of GDP, a level higher than that predicted by many economists. More aggressive spending plans have raised concerns that the government will face the EU face-to-face. They also intensified market concerns about Italy's public debt.

"The size and composition of the Italian tax expansion increase the risk of a series of downgrades in credit rating and could give rise to difficult discussions with the European Commission," said Silvia Ardagna, economist at Goldman Sachs.

Laureline Chatelain, Fixed Income Strategist for Pictet House of Funds, added:

Between confrontations with the EU, the likely downgrading of ratings and prospects for slowing economic growth, Italy's sovereign debt outlook remains muddy. Further details on the budget proposed by Italy will be essential to assess the future dynamics of the debt.

Claudio Borghi, the economic leader of the ruling party, said the country would be better off financially if it was not part of the eurozone.

"I'm really convinced that Italy would solve most of its problems if it had its own currency," Borghi said in a radio interview, according to a Reuters report.