Italian Bonds Are On Fire

Meanwhile, Italian bonds screamed higher on Friday.

10-year yields fell by something like 20bps at one juncture and are now at their lowest levels in more than a year, as market participants reach following the ECB’s forward guidance extension and Draghi’s suggestion that the central bank has the capacity to restart QE if necessary.

Obviously, the political situation in Italy is the very definition of “fluid”, with Matteo Salvini in position to theoretically pull the plug on the tenuous coalition with Five Star any time he chooses thanks to League’s 34%+ showing in the EU elections.

Speculation has mounted over the past two weeks that Five Star’s time to acquiesce to League’s demands on fiscal policy is running short indeed, and Premier Conte at one point threatened to resign unless Salvini and Di Maio stopped feuding.

The two deputy PMs had a phone call this week followed, apparently, by a face-to-face. They’ll meet with Conte early next week and then hold a cabinet meeting, Il Messaggero said Friday. That meeting will of course revolve around Salvini’s demands, which nobody is in a position to challenge.

Earlier this week, the EU officially began the budget disciplinary process which, in a worst-case scenario, would entail Italy being forced to choose between paying a sizable fine, or else being in violation of EU law.

Read more: EU Officially Comes For Italy

FinMin Tria will meet with Pierre Moscovici on the sidelines of the G20 in Japan and he’ll also chat with Bruno Le Maire. Oh, and Tria has a date with Steve Mnuchin, too.

Amid rampant concerns that Salvini has designs on pushing Italy towards leaving the single currency, the outspoken nationalist firebrand sought to reassure everyone on Friday. “[Exiting the single currency] isn’t remotely in our program nor among our intentions”, he told reporters in Rome. As far as the mini-Bot discussion goes, Salvini reiterated that they’re not money, but rather a prospective “form of payment for public debts”. Forgive me, but I’m not sure that helps. They’re a parallel currency – and Salvini’s Friday comments do absolutely nothing to dispel that notion.

In any case, the BTP-bund spread fell more than 16bp while the Italian front-end rallied nearly 20bp to close the week.

Also on Friday, Italy’s central bank revised their growth estimates lower versus January’s projections. The Italian economy is seen expanding at a 0.3% pace in 2019, 0.7% in 2020 and 0.9% in 2021. Those figures represent downward revisions of 0.3%, 0.2% and 0.1% from five months ago. The central bank blames the external environment. “The revision mainly reflects the greater weakness of foreign demand observed in recent months and the continuing deep uncertainty expressed in the business surveys”, a report reads.

As a reminder, Italy’s economy returned to growth in Q1 after falling into a technical recession in Q4.

Needless to say, there’s considerable doubt about where things go from here and there’s not much in the way of consensus on whether government-by-Matteo would be a positive or negative development for markets. On the one hand, his policies would ostensibly be more market-friendly than the current setup which is clouded by Five Star’s electoral promises. On the other hand, Salvini is an incorrigible euroskeptic and a xenophobe, things which are conducive to volatility – both in markets and in domestic politics.


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