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Italian Bonds Rally as Conte Pushes Back Against Fresh Elections

Italian Bonds Rally as Conte Pushes Back Against Fresh Elections

(Bloomberg) -- Italian bonds rallied to send yields to the lowest since 2016, as Prime Minister Giuseppe Conte pushed back against the prospect of fresh elections, keeping the door open to a more market-friendly coalition.

The securities led euro-area gains, after shrugging off losses ahead of Conte’s address to parliament. Conte said he will hand in its resignation, ending the current administration, but criticized Deputy Prime Minister Matteo Salvini’s push for power via a snap ballot.

Italian Bonds Rally as Conte Pushes Back Against Fresh Elections

Italian bonds have been whipsawed this month as investors are worried that a Salvini government would boost spending, leading to renewed conflict between Rome and Brussels over the nation’s budget deficit. Salvini’s immediate leadership ambitions could be torpedoed if a new coalition can be stitched together.

“The greater likelihood is that any elections will be held from Feb 2020,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA. “That limbo would be great for BTPs, meaning there are no immediate credit risks.”

Italian 10-year yields fell nine basis points to 1.35%, after touching the lowest since October 2016. The spread over equivalent German debt, seen as a key gauge of the country’s risk, fell five basis points to 204 basis points.

An alliance between the Five Star Movement, part of the current ruling coalition, and the center-left Democratic Party would be favored by markets, though the fragility of any pact could limit a potential rally, according to Citigroup. For now, such an outcome could delay a battle over next year’s budget in the coming months.

“The rally is all about the budget proposals getting delayed,” says Rishi Mishra, analyst at Futures First.

To contact the reporters on this story: James Hirai in London at jhirai3@bloomberg.net;John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, William Shaw

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