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Prospect Of Functioning Government Now Good Enough For Desperate Yield-Seekers, Italy Proves

"Sooner or later, the judgement of the people will be heard".

In a testament to something, although it’s not entirely clear what, 10-year yields in Italy on Wednesday fell below 1% on hopes the latest government crisis will “resolve” itself in a coalition between Five Star and the Democrats that will keep deposed PM Giuseppe Conte on as Premier.

The Democratic Party finally backed Conte after days of wrangling and now, the only sticking point appears to be Luigi Di Maio’s demands to retain his role as Conte’s deputy.

Benchmark yields for Italy fell as low as 0.98% amid optimism around the new coalition, which, if consummated, would mean Rome avoids a bruising budget battle with Brussels (a Five Star-Democrat tie-up would likely respect EU budget rules) and averts elections (which would have almost surely handed the country to Matteo Salvini).

With long-end Italian debt still offering positive yields, it represents something of a “bargain” for European investors, who are staring down a veritable funhouse mirror in the fixed income market, where government curves (and even some corporate curves) are completely negative.

The BTP-bund spread has narrowed to 173bps, the lowest premium over safe-haven German debt since the BTP meltdown in May 2018.

“The League is clearly the party that would lose the most should 5SM and PD forge a deal to form government”, Barclays wrote last week.

League doesn’t sound like they are amused that their demagogue’s coup attempt is on the verge of failing.

“Let’s hope that if a Democratic Party-Five Star government is formed, the people will rise up as soon as possible”, League minister Alessandra Locatelli said this week, apparently calling on Italians to take to the streets to protest what the party is pitching as a bid to subvert the will of the people.

League secured 34% of the vote in May’s EU elections, and as of late July, nobody was polling anywhere close.

“A government made up of Five Star and the Democrats will not correspond to the sentiment of the people”, Salvini declared this week.

Donald Trump, unable to restrain himself from injecting his influence into the politics of other countries, endorsed Conte on Tuesday. “Starting to look good for the highly respected Prime Minister of the Italian Republic, Giuseppe Conte”, Trump said, adding that he “represented Italy powerfully at the G-7”.

Somebody forgot to tell Trump that Salvini is the US president’s ideological counterpart on everything from fiscal policy to immigration. The US president went on to describe Conte as “a very talented man who will hopefully remain Prime Minister!”

Salvini delivered a stark warning. “If you make deals that are against nature, in the end the people will kick you out”, he reportedly said. “Sooner or later, the judgement of the people will be heard”.


 

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