Italy Investors Turn a Blind Eye to Politics as Bonds Seen Cheap

(Bloomberg) -- Italy’s bond investors are looking beyond heightened political risks as cheap valuations on the nation’s debt relative to its peers make it attractive.

Bondholders are justifying buying Italian securities on the back of improving economic growth and the recently formed grand coalition in Germany, which boosts the prospects for euro-area integration, according to Rabobank International. HSBC Holdings Plc would likely be among those buyers.

While Italian 10-year securities slipped Monday after reports that Matteo Salvini, leader of the League party, would start talks with the head of the Five Star Movement Luigi Di Maio, yields are lower than before Italy’s March 4 election. The yield touched the lowest since mid-December last week, thanks in part to the relative cheapness versus Spanish bonds.

“The uncomfortable upshot of this analysis, however, is the fact that it leaves one flying blind,” Rabobank strategists led by Richard McGuire wrote in a note to clients. “This leaves us feeling conflicted with political issues arguing in favor of a wider BTP-bund spread, but the primacy of carry and a hard-to-measure investor bias meaning a further tightening cannot be ruled out.”

Italy’s 10-year yield spread over Germany narrowed two basis points to 137 basis points as of 8:08 a.m. in London. The yield premium over comparable Spanish bonds, at 65 basis points, the widest level since July. The next test of investors’ appetite for Italian securities may come Wednesday, when the nation is scheduled to auction debt including as much as 3 billion euros ($3.7 billion) of 10-year bonds.

Worst Outcome

An outcome in which non-mainstream parties help form a government was perceived as the worst for bond investors before the vote, predicted to widen the 10-year yield spread over Germany to 260 basis points, according to a Bloomberg survey.

For HSBC, political uncertainty doesn’t pose a broader threat to the wider euro-area project, and therefore limits much further upside in Italian yields, while the rally in Spanish bonds may be topping out as yields draw closer to semi-core countries, such as France.

“Italy is cheap compared to Spain,” HSBC’s global head of fixed-income research Steven Major told Bloomberg Television. “There isn’t a threat to the EMU project, or in terms of Italy’s membership and that’s what really matters. I would be looking more to be a buyer on weakness.”

--With assistance from Francine Lacqua and Charlotte Ryan

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, Keith Jenkins, Anil Varma

©2018 Bloomberg L.P.