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Salvini’s Italy Is Missing Out on the Global Bond Euphoria

Salvini’s Italy Is Missing Out on the Global Bond Euphoria

(Bloomberg) --

Italian bonds and stocks plunged after one of the coalition partners withdrew support to a government that has been in power for a little more than a year.

Benchmark 10-year yields were headed for the biggest increase in more than a year after Deputy Prime Minister and League leader Matteo Salvini said late Thursday that the administration no longer held a majority in parliament and called for “swift” elections. Italy’s banking stock index hit the lowest level in three years.

Salvini’s Italy Is Missing Out on the Global Bond Euphoria

Italian markets have had a bumpy 14 months since a coalition between the right-wing League party and the anti-establishment Five Star Movement formed and announced plans to raise spending, putting it on a collision course with the European Union.

“It’s the uncertainty that people can’t see past,” said Charles Diebel, head of fixed income at money manager Mediolanum SpA. “There remains political risk on the horizon ahead of the budget and as such, it is precluding further outperformance versus the core despite the yield pick-up.”

Ten-year bond yields climbed as much as 29 basis points, headed for the biggest increase since May 2018, to 1.82%, taking the spread over German bonds to the widest level in a month. Italian stocks tumbled, with the FTSE MIB index dropping 2.5%. The FTSE Italia All-Share Banks Index sank 4.6%.

Salvini’s Italy Is Missing Out on the Global Bond Euphoria

Ratings Review

Fitch Ratings is due to review the nation Friday and currently has it at BBB, two notches above junk. Both Societe Generale and Danske Bank believe the ranking will be kept unchanged, given the conflict with the EU has been put on hold for now. SocGen recommends that investors maintain an overweight position in Italian bonds.

Prime Minister Giuseppe Conte signaled he won’t leave office without a fight, saying that he won’t let his opponent dictate the pace of events. His comments offered a glimmer of encouragement to those in Rome still hoping for an anti-Salvini coalition that could survive long enough to approve a budget for next year.

That renders a mixed picture for investors. The League has surged in polls and is perceived by the market as being more fiscally prudent if it were to govern without Five Star. Still, many in the market also worry about the party’s lingering euroskepticism. Salvini himself has talked about the introduction of so-called “mini-bills,” seen by many as an alternative currency.

It’s not something that concerns BlueBay Asset Management’s chief investment officer Mark Dowding, though. He is another investor sticking to his bullish view, given that they offer some of the highest yields in the euro area, while the chance of an Italian exit from the European Union is still overpriced by the market.

“In a world where bund yields continue to print record lows, we feel this will serve to flatten yield curves and tighten spreads,” said Dowding. “With investors looking to grab yield, valuations on Italian bonds remain very attractive compared to most other investment grade assets in the euro zone.”

--With assistance from Blaise Robinson.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

©2019 Bloomberg L.P.