Italy Markets Rally as Government Said to Revise Deficit Lower

(Bloomberg) -- Italian assets surged after the government was said to propose a revised deficit target in line with demands by the European Union.

The yield on 10-year bonds dropped below 3 percent for the first time since September and stocks climbed after a Treasury official said that the deficit would be revised down to 2 percent from the 2.4 percent initially mooted by the coalition government. Deputy Prime Minister Matteo Salvini dismissed reports his party would seek another election in the new year, setting the tone for markets earlier in the day.

Italian bonds have enjoyed a period of relative stability in recent weeks amid signs of cooling tensions with the EU over plans to increase the budget deficit to fund tax cuts, pension reform rollbacks and a basic income for the poorest. Some more leniency from the bloc may be needed after reports that France too would be in breach of fiscal rules in the wake of the yellow-jacket protests.

“This is very good for BTPs,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S, who said 10-year yields could drop toward 2.75 percent. “The 2 percent deficit level is more positive news, but let’s see if they are ready to walk the walk now that they have done the talk.”

Ten-year yields fell 13 basis points to 2.99 percent as of 1:00 p.m. in London. That took the spread over their German peers down 16 basis points to 271 basis points, the lowest since Oct. 1. Two-year yields, seen as a barometer for Italian default risk, slid 19 basis points to 0.47 percent, a six-month low. The FTSE MIB Index rose 1.8 percent, led by banks.

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