Italy Markets Buoyant After Rome Blinks in Staring Match With EU

(Bloomberg) -- Italian bonds and stocks extended a rally after Prime Minister Giuseppe Conte confirmed plans to lower the budget-deficit target for 2019, a move meant to cool tensions with the European Union.

Yields on 10-year government debt fell to the lowest level since September after Rome proposed to cut the shortfall to 2.04 percent of output, from the previous goal of 2.4 percent that was rejected by the EU. The country’s benchmark share index headed for a two-day gain of more than 2 percent.

The rally stalled after European Central Bank President Mario Draghi said that bond reinvestments next year would remain in the same jurisdictions that they were originally bought, so will not be diverted toward Italy. Purchases would also be gradually be moved toward new capital key, which has fractionally lowered the proportion of Italian bonds eligible for purchase, relative to those of Germany.

Italy Markets Buoyant After Rome Blinks in Staring Match With EU

Rome’s conciliatory stance is stoking optimism the EU will delay or temper any disciplinary action planned against Italy for its failure to comply with the bloc’s rules. The nation’s bonds offer the highest investment-grade yields in the euro area and are trading at a significant discount to where they started the year. Speculation about early elections may also help support the securities, according to Commerzbank AG.

“Speculation about new elections and a budget compromise with the EU are supporting Italy sooner than we had anticipated,” Christoph Rieger, a rates strategist at Commerzbank, wrote in a note to clients. “The momentum may well carry on near term.”

Italian 10-year yields dropped seven basis points to 2.93 percent, having touched 2.88 percent, the lowest level since Sept. 27. The spread over those on German bonds shrank six basis points to 266 basis points. Five-year bond yields dropped as much as 17 basis points to 1.89 percent.

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