Italian Yields Tumble to Record Low as Coalition Deal Seen Near
Italian Yields Drop to a Record Low as Coalition Deal Seen Near
(Bloomberg) -- Italian bonds surged to take benchmark yields to a record low as talks progressed to form a new government, reducing the political risk of fresh elections for investors.
Ten-year yields fell below 1% for the first time and their premium over Germany, a key gauge of risk in the nation, touched the lowest level since May last year when the previous coalition was being formed. Disagreements over who would take key roles in a new government showed signs of thawing as the Democratic Party backed the Five Star Movement’s choice of Giuseppe Conte as Premier after days of negotiations.
Italian bonds are catching up with a global rally this year, after lagging their euro-area peers as the nation repeatedly battled the European Union over deficit levels. They are still one of the few in the region to offer positive yields, and with the European Central Bank expected to re-start quantitative easing next month, the debt still looks cheap, according to Danske Bank A/S.
A tie-up between Five Star and the Democrats has been heralded as the best option for markets as they are seen as being less confrontational to the EU. It would also avoid the possibility of fresh elections in which League leader Matteo Salvini would likely emerge victorious.
“It seems like the market can only believe in a positive outcome,” said Jens Peter Sorensen, chief analyst at Danske Bank. “Salvini was heading for a confrontation and with ECB reopening QE, then investors are scrambling for yield.”
Italy’s 10-year yield dropped 16 basis points to 0.98%, a record low. The spread over German bunds narrowed to 170 basis points. Shares in Italian lenders gained ground, with the FTSE Italia All-Share Bank index rising to outperform a weaker Stoxx Europe 600 bank index.
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President Sergio Mattarella will consult with the major parties from at 4 p.m. local time. The Democrats insist on placing one of their own to be deputy premier in exchange for Conte remaining prime minister, while Five Star leader Luigi Di Maio also wants a deputy slot.
“There certainly is the potential for an accord with a will and some compromises,” said Ciaran O’Hagan, a rates strategist at Societe Generale SA. “While we have no crystal ball when it comes to politics, the prospect of a large rally, back to levels seen before May 2018, is greater than a selloff toward the wide spreads seen in May and early June,” he said, referring to the premium over Germany.
--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, Neil Chatterjee
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