Italian banks underperformed today amid news that the national unemployment rate continued to rise.

The rate of jobless ticked up to 12.7% in November from 12.5% the previous month, and youth unemployment - already a national emergency, according to the government - rose to 41.6%. The figures served as a reminder that Italy's economy is stagnating and unlikely to grow at a healthy pace anytime soon.

Unicredit (154bps, +12) and Intesa Sanpaolo (142bps, +12) both widened and lagged behind the broader market. The Italian government is expected to issue about €470bn this year, and large proportion of this debt will end up on the balance sheets of the country's banks. The treatment of government bonds under bank capital rules partially incentivises this trend, though the continued compression in peripheral government bonds yields may eventually result in a shift in asset allocation.

However, the spread widening today should be placed in a broader context. Unicredit's and Intesa's spreads have more than halved since last summer, and there appears to be no immediate catalysts that would trigger a major reversal. But the ECB's asset quality review could bring challenges for some banks based in the periphery, and balance sheet strength under duress remains an issue.

The CDS market as a whole gave up ground ahead of the FOMC minutes due after the European close. Investor will be looking for clues on the support for QE tapering after December's decision to reduce the pace of bond purchases. The Fed is likely to indicate that the pace of tapering depends on economic data, and will keep forward rate guidance in place.

The Markit iTraxx Europe was 2bps wider at 70.5bps, while the Markit CDX.NA.IG widened by 1bp to 65bps.

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