Europe’s Political Anguish Spreads From Spanish to Italian Bonds

  • Spread between two countries narrows to least since December
  • Five Star Movement’s Raggi wins first round of Rome vote

First Portugal, Spain and the U.K., now it’s getting political for bonds in Italy.

After some investors sold Spanish debt as parties struggled to form a government, signs that Italian Prime Minister Matteo Renzi is starting to lose a so-far solid backing pushed his nation’s yields up. The premium Spain pays on its securities compared with Italy has shrunk to the smallest since the Iberian country’s inconclusive election in December.

In Rome, Five Star Movement’s Virginia Raggi, 37, is on track to win the mayoral race in Italy’s capital later this month in what would be a major breakthrough for the anti-austerity, anti-establishment group. A referendum in October, where Renzi will consult Italian voters on measures to overhaul the Senate and bolster the government’s power, is also likely to keep investors on edge. Italy is the world’s fourth-largest bond market, with $2.1 trillion of securities in circulation.

“The Italian vote sounds like an alarm bell for the investors that see as a risk the rise of anti-euro parties in Europe," said Vincenzo Longo, a strategist at IG Markets in Milan. He said the referendum “will be the real test for the government.”

Gridlock Risk

Italian government bonds have returned 1.9 percent in this year while investors in Spanish sovereign debt made 2.7 percent, according to Bloomberg World Bond Indexes. Both are less than the 4.5 percent returned by German bunds.

Yields on Italy’s 10-year benchmark bonds climbed on Monday, also as they rolled into a new security maturing in June 2026, before recovering a day later. Spanish debt now yields four basis points more than Italy compared with 18 points at the start of the year. The spread between Italy and Germany meanwhile has widened.

Renzi has said he would resign if the referendum went against him. That could trigger new elections and “a period of political gridlock,” according to Milan-based analyst Nicola Nobile at Oxford Economics Ltd. If there were no clear majority “this would be negative for political stability and could mean a sustained period of policy inaction, possibly bringing some negative credit actions from the rating agencies,” he said.

The bond market in Italy came under pressure earlier this year because of concern over the health of the country’s banks. The risk now is the country follows a pattern more familiar to Spain, where a second national election in a little more than six months threatens to be inconclusive again. The vote is on June 26, three days after Britain’s referendum on European Union membership.

ECB Shield

Markets have been partially shielded by the European Central Bank’s quantitative easing program. Fears that Britain might vote to leave the EU along with a wave of populist movements slowly chipping away at support for ruling parties are adding to the concern about a prolonged period of political upheaval.

There is a “plethora of political events in Europe over the coming weeks,” said David Schnautz, a London-based fixed-income strategist at Commerzbank AG in London. “We remain cautious on peripherals in general.”

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