In Italy: Digestif

Well, as illiquid markets are prone to do, BTPs are rallying hard on Wednesday as traders desperately try to determine whether Tuesday’s panicked, fire sale was a buying opportunity or a harbinger of something even worse.

Italian bonds were higher out of the opening gate with some folks citing a more conciliatory stance by Five Star’s Di Maio, who apparently will not form an electoral alliance with the recalcitrant League, whose Matteo Salvini said the following today about the prospect of trying to salvage the coalition government by reconciling with President Mattarella:

Di Maio’s overture? We’re not at the market and it’s also a question of dignity.

Di Maio would later say he intends for Five Star to form a government alone after the elections.

So that’s actually “good” news as far as Italy’s populists go. Recall the following from Barclays:

Whether L and 5SM decide to join forces ahead of the next election is likely to heavily influence the rhetoric of the electoral campaign and potentially the significance of the next electoral appointment in Italy, and with that, market sentiment. If the two anti-establishment forces were to team up, they might decide to adopt an explicitly anti-European stance, possibly even more forceful than the one held since the electoral campaign started in January.

If that electoral alliance is off the table, it’s probably a positive development.

Italian stocks are sharply higher on the day, trimming this week’s losses to under 3%.


2-year yields are down something like 100bps on the day, paring yesterday’s record rise but again, this market isn’t very liquid right now, so there’s no telling:


Auctions of 5- and 10-year bonds went ok, all things considered. But really, that depends on who you ask.

If you ask DZ Bank’s Daniel Lenz, he’ll tell you the sales didn’t fail in part because “the size was very little, roughly a little more than half of the previous amount” and also because there’s a maturing BTP on Friday and it’s held primarily by Italian banks who will obviously be rolling their sovereign exposure.

“The volume was much lower and the ‘strong demand’ only refers to the bid/cover ratio,” Lenz said, adding that “the sum of all three bonds was EU5.6b compared to the previous EU9.25b on the same three bonds.”

Also, this:

Whatever the case, 10Y yields for Italy are down some 27bps on the day:


Meanwhile, Italian banks are “bouncing” although I would caution that there’s still a long – long – way to go:



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