Italian 10-year bond yield rose to the highest level since 2014, climbing eight basis points to 3.51 percent earlier this morning, after touching 3.52 percent, the highest level since February 2014.
The two-year yield jumped 14 basis points to 1.49 percent.
Mizuho rates strategist Antoine Bouvet said: “We are a bit surprised by the strength of the reaction in bond markets, but it appears the market is jumping to the conclusion that the European Commission will take a hardline stance when Italy submits its budget.”
Rome has spooked investors in recent weeks after announcing proposals to set out a deficit goal of 2.4 percent of GDP for 2019.
But the new deficit target would be three times the 0.8 per cent borrowing goal set by the previous centre-left administration, sparking EU fears.
This weekend saw the European Commission brandish the targets as a “source of serious concern” after Italy vowed it would “not retreat” over its budget.
A letter, signed by European Commission Vice President Valdis Dombrovskis and European Union Economic Affairs Commisioner Pierre Moscovici, said: “We call on the Italian authorities to ensure that the budget will be in compliance with the common fiscal rules and look forward to seeing the details of the measures.”
Italy’s Deputy Prime Minister Matteo Salvini said this morning the government would not cave in to market pressure and backtrack on its deficit spending plans.
Mr Salvini said, noting the gap between Italy’s benchmark 10-year bonds and the German equivalent had widened: “If one had evil thoughts, he would think there are people betting on the spread because they don’t want Italy to grow and create jobs.
“We will not backtrack, we will not backtrack.”
Mr Salvini spoke during a press conference with French far-right leader Marine Le Pen in Rome.
Italy is planning to reduce the headline deficit to 2.1 percent in 2020 and to 1.8 percent in 2021.
The eurozone sets overall targets of 3 percent annual deficits and commits countries to move toward 60 percent overall debt.
Italy’s debt is already the second highest in the eurozone as a share of economic output after Greece, at about 131 percent of GDP.
The Italian government will formally submit its draft budget to Brussels by October 15, but Mr Juncker has warned Italy not to expect “further special treatment”.
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