Investors’ Referendum Fears Over Italy Yields Seen Overblown

Updated on
  • 10-year yield up 35 basis points if Renzi loses vote: survey
  • Rise would be moderate, leaving Italian borrowing costs low

While doomsayers have warned of negative fallout if voters say “No” in Prime Minister Matteo Renzi’s December referendum, Italy’s borrowing costs would probably move up only moderately, a Bloomberg survey of analysts showed.

The 10-year bond yield could climb 35 basis points, according to the median of 18 forecasts in a poll published Tuesday. The estimates ranged from 10 to 100 additional basis points, according to the survey conducted from Oct. 7 until Monday.

“I expect an increase in Italian bond volatility on the referendum days and I suppose an increase of 30 basis points as political risk," said Attilio Bertini, head of research at Credito Valtellinese SC in Sondrio, Italy. A basis point is the equivalent of 0.01 percentage point.

In November 2011, the country’s 10-year yield rose to more than 7 percent, forcing then Prime Minister Silvio Berlusconi to quit amid signs of contagion from Greece. By contrast, the yield was 1.39 percent -- or 139 basis points -- at 10:30 a.m. on Tuesday in Rome, just 35 basis points higher than the record low that was reached in August.

“I can’t imagine, I don’t want to imagine a situation like the one in autumn 2011,” Bertini said in his written response to the survey.

Carlo Messina, the chief executive officer of Italy’s second-largest bank Intesa Sanpaolo, said in an interview with German weekly WirtschaftsWoche over the weekend that the referendum is not a turning point in the history of the country. It would be an exaggeration to say a rejection could endanger Italy’s political stability, Messina said.

Some analysts expect a bigger yield rise. The victory of a “No” vote would “put immense pressure on Prime Minister Renzi to resign, increase pressure on the country’s banking system and hamper economic growth," said Alan McQuaid, an economist at Merrion Capital in Dublin. He expects the 10-year securities to return 50 to 100 additional basis points.

All but one of Italy’s main polling firms signaled this month that “No” will prevail in the  Dec. 4 referendum designed to streamline the country’s government. 

The extra yield investors demand to hold Italian 10-year securities over similar-maturity Spanish bonds was below 30 basis points on Tuesday, down from 37 basis points at the Oct. 10 close.

Knee-jerk reaction

“I think a knee-jerk reaction is likely if the motion is rejected,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics in Newcastle, England. “But Italy’s short-term debt fundamentals are decent, given an external surplus and an accommodative” stance by the European Central Bank that has been buying the country’s securities under its quantitative-easing program.

The Bloomberg poll also showed respondents were split on the Italian economy’s ability to meet a government growth target of 1 percent next year, with 12 saying it will not miss the goal while 11 said it will. A separate Bloomberg survey on Monday showed the euro region’s third-biggest economy will expand 0.8 percent in 2017, according to the median of 36 economists’ forecast.