The Italian Bond Saga

The Italian populist leader, Salvini, appeared to have said the “right” thing and we finally see a fall in italian government yield.

Italy’s leaders have been whipsawing markets and the EU with contrasting statements all summer, pushing bond yields to a five-year high last week.  Salvini scared investors late Sunday (2018-09-02) by floating the idea of a deficit near the EU’s 3% limit.  That was in stark contrast to statements made by Finance Minister Giovanni Tria that Italy would respect its commitments.

Then on Tuesday, 2018-09-04, Salvini told Ansa newswire that his country “will respectall the rules” and will “help Italians live better without irritating those that observe us from high.”

The impact of that message caused the Italy-German 10-year bonds spread to narrowed to 255 basis points on 2018-09-04 (Tuesday) from 291 on 2018-08-31 (Friday) before Fitch ratings  changed its outlook on Italy to negative from stable citing budget concerns.

However, the Italian Bond saga may not be over until the budget details are nailed down and the European Union signs off.  In the meantime, this bond market rally might be built on sand.

Here are the key dates to the saga:

1. The Italian government must publish its Economic and Financial document no later than Sept 27.
2. After that, the Draft Budget Plan will be submitted to the commission on Oct. 15.
3. The new budget law should be in place before the end of the year.

Reference:

1. Bloomberg, Marcus Ashworth, 2018-09-05, “Welcome to the Italian Bond Market Circus”
2. Bloomberg, Lorenzo Totaro and Boris Groendahl, 2018-09-05, “Italy’s League Discussing Budget Deficit Below EU Limit”