markets

Italian Markets Are Having Another Tough Day

Updated on
  • Italian bonds drop for second day, while corporates also fall
  • Market focusing on risk to Italy’s deficit, says Mizuho

Italian bonds slid as the country’s new government continued to unnerve investors and European Central Bank policy makers flagged the prospect of talks to end its debt-buying program.

The declines were led by two-year bonds, which have swung wildly over the past week. Italy’s new Prime Minister Giuseppe Conte passed a confidence vote in the Senate Tuesday following his maiden speech that stuck to a spending platform outlined by the Five Star Movement-League coalition. Investors are also factoring in the potential for reduced support for the region’s debt from the ECB as it may discuss ending quantitative easing at its meeting next week.

“Jitters continue to resurface as markets face the new reality of the Italian populist government,” wrote Commerzbank AG strategists Rainer Guntermann and Christoph Rieger in a note to clients. “Conte’s speech to the parliament reiterated that the government’s drastic plans as outlined in the coalition agreement will eventually be implemented amid markedly more spending.”

The Five Star-League coalition’s policies include income support for the poorest, the unraveling of pension reforms and flat taxes for corporations and families -- something that could cost over 100 billion euros in its first year.

Long-term international investors were steering clear of buying Italian bonds, while hedge funds were adding to short positions, according to one London-based trader, who asked not to be identified because they are not authorized to speak publicly.

Italy two-year yields surged 37 basis points to 1.37 percent, while those on 10-year bonds were up 15 basis points to 2.94 percent. Italy’s FTSE MIB Index bucked early gains in European stocks before closing 0.3 percent higher.

ECB Beneficiary

Italian debt has been one of the main beneficiaries from the ECB’s $2 trillion government bond-buying program. Around 16 percent of the market is held by the bank, according to Societe Generale SA estimates.

The ECB’s Chief Economist Peter Praet confirmed that the June 14 policy meeting will be pivotal for reaching a decision on when to end the QE program, while Governing Council member Klaas Knot said it would be “reasonable” to announce an end to asset purchases soon.

Credit-default swaps insuring Italian debt surged 14 percent to 235 basis points, approaching the five-year high reached last week, signaling deterioration in perceptions of credit quality. Italian companies were among the worst-performing in Europe’s high-yield market on Wednesday.

“With less QE support, Italian macro fundamentals become much more important for market pricing of Italian bonds and right now the market is focusing on the upside risk to the Italian deficit,” said Peter Chatwell, head of rates strategy at Mizuho International Plc.

— With assistance by Stephen Spratt, Katie Linsell, and Blaise Robinson

(Updates market prices in sixth paragraph.)
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