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Italy’s Risk Barometer Trades as Though March Never Happened

Italy’s Risk Barometer Trades as Though March Never Happened

(Bloomberg) -- After a wild month that saw debt costs spiral out of control at one point, Italian bonds are back in favor.

It’s yield premium over Germany’s 10-year notes, a key gauge of risk in the country, is back where it started the month, thanks largely to efforts by the European Central Bank to avert a fresh sovereign debt crisis in the face of the coronavirus.

Italy’s Risk Barometer Trades as Though March Never Happened

The ECB launched a 750 billion euro ($823 billion) pandemic bond-buying program and removed limits on how much of a country’s debt it can buy. That’s helped to damp the effect of the Italy’s fiscal splurge after the spread of the coronavirus ground its economy to a halt. The nation’s public debt was at 135% of GDP before the outbreak hit.

“The ECB’s toolkit is much better than it has had in the past,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc, which recommends investors add a tightening trade on the Italian-Germany 10-year yield spread to 120 basis points, from around 170 currently. “Without the issue limits, the pandemic program is credible as a backstop.”

The spread blew out to more than 320 basis points this month after ECB President Christine Lagarde said it wasn’t the institution’s job to reign in yield gaps.

©2020 Bloomberg L.P.