Eurozone periphery bonds slide as investors prefer safe-haven German bunds on Brexit worries

The Eurozone periphery bonds plunged on Wednesday as fears over instability in the European Union returned, which trigged a worldwide selloff in lower-rated debt and a flight to haven investments such as German bunds.

The 10-year Italian sovereign bond inched higher 2 basis points to 1.263 percent, Portuguese 10-year bonds yield bounced 2-1/2 basis points to 3.038 percent, Spanish 10-year bonds yield climbed more than 2 basis points to 1.190 percent by 08:45 GMT.

Moreover, rising concerns about a new banking debt crisis in Italy provided a further incentive for investors to buy safe-haven German bonds. In Italy, 17 percent of banks’ loans are sour. That is nearly 10 times the level in the US, where, even at the worst of the 2008-09 financial crisis, it was only 5 percent. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

Italy's third-largest lender, Banca Monte dei Paschi di Siena SpA, bad loans were so thick it assigned a team of 700 to deal with them and created a new unit to house them. The ECB asked the bank to slash its bad debts by 40 percent over three years. Italy's banks are saddled with 360 billion euros of bad loans, a third of the euro zone total.

According to Reuters, the European Central Bank's Governing Council was holding a meeting on Wednesday. Although this was a non-monetary policy meeting, Commerzbank analysts said speculation about adjustments to the ECB's bond-buying programme "add spice" to the gathering.

The ECB is facing a scarcity of eligible bonds for its bond-buying programme in countries such as Germany where most purchases are made. The issue has become more pressing with the sharp fall in bond yields following the Brexit vote.

Lastly, investors also wait for the FOMC June meeting minutes, which will be published Wednesday, 6 July at 18:00 GMT. Markets will likely pay close attention to this release in an attempt to estimate the Fed's likely next step.

Meanwhile, the pan-European STOXX 600 index was down 1.36 percent and the euro-area blue-chip gauge, the STOXX 50 dipped 1.45 percent. The DAX trading 1.72 percent lower and the CAC-40 fell 1.46 percent by 08:45 GMT.