Italian and German Bond Widening?
The spread between Italian and German bond yields is widening…Although the benchmark bond yield is still much better than the 326 basis points in November 2018, when the markets recoiled at the former League-Five Star government, a nativist-populist coalition.
What is causing the widening of the spread?
Draghi is an alum of Goldman Sachs Group Inc.’s management committee. Larry Fink of Blackrock Inc., the world’s largest investment firm describes the prime minister as “a friend”.
But opinion polls indicate that if Italians were to vote in a general election today they would most likely bring in a far-right government. About 60% of votes would be more or less equally divided between the right-wing, anti-immigrant League, the far-right Brothers of Italy and the center-left Democrat Party. Crucially, polls suggest the League and Democrats have lost support while Giorgia Meloni’s Brothers of Italy has gained. That’s important because the League and Democrats are members of Draghi’s coalition but the Brothers of Italy is not.
Italy’s presidency is up for grabs in January 2022, and Draghi’s government theoretically runs until 2023. Or more specifically, Draghi’s grand coalition must end no later than 2023-06-01 – the next Italian General Election, if political squabbles don’t end it sooner.
In my opinion, the widening of spread is part of the market volatility for now. Moving forward, as Vaccination roll out in Italy and Europe, we might see spread compressed again and European equities to outperform USA, since Europe has been laggard in this “recovery”.
Some positive news about Italy, is that as of 2021-05-15, Saturday morning, 8.3 million or 14% of Italy population were completely vaccinated. Around 10 million had received a first jab. More important, according to Italian Reserach published, Covid-19 infections in adults of all ages fell by 80% five weeks after a first dose of Pfizer, Moderna or AstraZeneca vaccine.
Reference
- Bloomberg, 2021-05-20, “Mario Draghi Masks the Longer-Term Danger for Italy”
- Reuters, 2021-05-15, “Italian Study Shows Covid-19 Infections, Death Plummeting After Jabs”
