Italian Jobless No Obstacle as Bond Yields Hit Lows: Euro Credit

Italy is finding a record unemployment rate is no impediment for bond investors.

The country’s debt rallied in the first quarter on expectations the euro area is recovering from the financial crisis, bringing Italy along with it. After the European Central Bank signaled it may deploy new measures to stoke growth, the nation’s 10-year bond yield plunged to new lows this week.

Italy’s economy will grow 0.8 percent this year, continuing a trend that started at the end of 2013, Prime Minister Matteo Renzi said last week. The jobless rate will stay close to the record 13 percent in February, fueling concerns among economists the recovery is doing little for long-term employment.

“At a time of structural reforms and spending cuts, a rise in Italy’s unemployment has been clearly priced in,” said Nicola Marinelli, who helps oversee $180 million at Sturgeon Capital Ltd. in London. “Whether a jobless recovery is sustainable is more a question for economists.”

The yield on 10-year Italian bonds was little changed at 3.11 percent at 1:45 p.m. local time, after dropping to 3.068 percent, the lowest since Bloomberg started collecting the data in 1993. Buyers are expecting demand from local investors at a sale of inflation-linked debt will be reinforced by foreigners as the economy improves.

Productivity Focus

“Investors will pay attention to those numbers pointing at higher economic activity such as output and productivity,” said economist Giada Giani at Citigroup Inc. in London. At the same time, “it’s very hard to think of a sustainable recovery without a genuine rise in employment,” she said.

Italy mirrors other indebted euro countries. Greece returned to international debt markets last week. Its 10-year bonds yield 6.08 percent, down from double figures in September, yet the country’s unemployment rate is just shy of 27 percent.

One reason for the optimism may lie in Italy’s unemployment calculations. Thousands of furloughed employees, who don’t show up in the jobless statistics, may return to work from a government temporary layoff program as the economy gains steam. That could shut the door on potential new hires and leave the unemployment rate around record highs.

Italy’s jobless rate, once unemployment relief figures and jobseekers who declared they were no longer seeking work are included, exceeded 20 percent at the end of last year, according to data compiled by Bloomberg.

Budget Constraints

With government debt rising to 2.11 trillion euros ($2.9 trillion) in February, or 132.6 percent of 2013 gross domestic product, Renzi is counting on reduced spending to help fund tax cuts for lower-income workers and revive domestic demand.

That would also allow Italy to keep the country’s budget deficit within the European Union limit of 3 percent of GDP this year. As Renzi promised to pay arrears to private companies, Italy’s debt will climb again this year, reaching 134.9 percent of GDP, the government forecast last week.

Italy’s Treasury had to raise its gross funding target for this year by 20 billion euros to 470 billion euros after Renzi’s pledge to pay more state commercial debt arrears, a Finance Ministry press officer, who asked not to be named in line with internal policy, told Bloomberg News on April 11.

Expectations that the ECB will implement an anti-deflation program may boost further demand for Italy’s government bonds in coming months. Higher inflation would help with the nation’s debt reduction, Finance Minister Pier Carlo Padoan said, appearing next to Renzi at an April 8 news conference.

European Threat

In an interview with CNN recorded four days earlier, Padoan said that quantitative easing by the ECB “would be appropriate” for the euro area, adding that “low inflation has to be watched very carefully and action has to be prompt whenever it is deemed necessary.”

The minister also said that unemployment is “the threat number one to the European project,” not only for Italy.

In January, the last month for which comparable data are available, Italy was the only one of the euro region’s southern periphery nations where a rise in the unemployment rate was recorded. In Spain the rate was unchanged at 25.8 percent, while in Portugal it was stable at 15.3 percent, according to EU figures. In Greece, the rate fell to 26.7 percent in January, the statistical authority in Athens said.

Investors may decide not to pay attention to the implications of Italy’s total jobless rate.

Italy’s three-year yield dropped to a record low of 0.93 percent, with investors bidding for 1.41 times the amount sold at an auction of 3.5 billion euros on April 11.

Jobless Pledge

Earlier this month Renzi committed to bringing the jobless rate to below 10 percent “in coming months and coming years” by implementing his government’s economic policies.

“You’ll see in coming months how this change will bring Italy back below a double-digit unemployment rate,” the premier told reporters at an April 1 briefing in London.

In presenting the government’s official budget plan on April 8, Renzi was less optimistic and said that Italy’s jobless rate will be at 12.8 percent this year and 12.5 percent next. In 2018, when Renzi’s term is due to expire, the government sees unemployment at 11 percent.

“The economic recovery is still weak and the labor-market situation still difficult,” Padoan told lawmakers today.

Unemployment for the 18-nation euro area as a whole was 11.9 percent in February.

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