Italian Bonds Left Directionless Amid Conflicting Budget Reports

(Bloomberg) -- Italian bonds were tugged in different directions as investors digested a deluge of diverging news reports Tuesday about the country’s disputed budget plans.

The securities initially rallied as Il Messaggero reported that the country will cut its planned deficit next year after the European Union paved the way to start proceedings to fine the nation because the shortfall target breaches the bloc’s rules. The bonds later pared gains following a report citing Deputy Prime Minister Matteo Salvini as saying Italy will not submit any new budget documents to the EU.

In addition, Market News said the European Central Bank may be willing to buy Italian securities should further stress be seen, while the nation’s Treasury successfully sold the maximum one-billion-euro ($1.13 billion) allotment of inflation-linked five-year notes and 2.5 billion euros of zero coupon debt.

Salvini Signals

  • Salvini appeared to signal openness on Monday to adjusting the nation’s deficit 2019 target of 2.4 percent of gross domestic product, telling newswire AdnKronos: “I think nobody is fixated on this, if there is a budget which makes the country grow, it could be 2.2 percent or 2.6 percent.”
    • However, Salvini was cited by Ansa on Tuesday as saying that no new budget documents will be sent to the EU.
  • Armando Siri, an economic adviser to Salvini, said Tuesday that the government was considering reducing the deficit to 2.2 percent to 2.3 percent of GDP.

Bond Demand

  • After last week’s sale of inflation-linked bonds aimed at domestic investors was met with historically low levels of demand, there was focus on whether this week’s would suffer a similar hit -- but it passed the test.
    • Italy sold inflation-linked bonds due May 2023, with investors offering to buy 1.65 times the amount of securities sold versus 1.72 times at a previous auction in June.
    • The Treasury also sold zero coupon bonds due November 2020, with investors offering to buy 1.56 times the amount of securities sold versus 1.82 times at a prior auction last month.

ECB Report

  • The ECB could buy Italian bonds under its Outright Monetary Transactions program if the yield spread over German bonds comes under further stress, according to Market News, which cited unidentified officials. Still, the people stressed no such plan was under consideration.
    • Italian bonds initially bounced on the report, but unwound the move as skepticism remained high, especially given that Italy’s government may not want to accept such help.
  • “We all know OMT support is very much conditional on a request for help to the ESM, with conditions attached,” says ING Groep NV strategist Martin van Vliet.

End Result

  • After a six-basis-point round trip, the various reports left the yield on Italian 10-year bonds just one basis point lower on the day at 3.26 percent.
    • The spread over those on their German peers was at 291 basis points.

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