LONDON: Italy’s government bonds sold off on Tuesday, after new Prime Minister Guiseppe Conte promised to bring radical change as he sought parliamentary backing for an anti-establishment government.
Conte’s remarks echoed much of the policy programme set out in a coalition accord signed by the 5-Star Movement and the right-wing League: a budget-busting agenda of tax cuts and higher welfare spending.
“The speech shows there’s no signs that any of their proposals will be watered down, which is bearish for BTPs,” said Mizuho rates strategist Antoine Bouvet, referring to Italian government bonds.
“But there are no real surprises there – I think it’s the case of the market being sensitive, it’s more of a knee jerk reaction.”
Italy’s government bond yields rose sharply after the speech, with 10-year borrowing costs up 9 basis points on the day at 2.65 percent and 2-year yields up 11 bps at 0.86 percent.
Italy’s 10-year bond yield spread over Germany widened to 226 bps, from 213 bps the day before.
Germany’s 10-year bonds, seen as a safe haven in uncertain times, was in demand and the yield dropped back below the 0.40 percent mark, down 2 bps on the day.
“It will be Conte that represents Italy but I don’t think he will be the initiator of policy without talking to the two party leaders first,” Jan von Gerich, chief analyst at Nordea.
“So that means the focus for markets will be the plans from 5-Star and the League.”
Earlier in the session, euro zone government bonds had gleaned some comfort from a strong set of business surveys from Italy and Spain.
But even then, analysts had warned that the market could prove volatile and sensitive to headline risk.
Later on Tuesday, ECB President Mario Draghi is scheduled to speak, with investors watching closely for any indication of how the political developments in southern Europe may affect monetary policy.
Source: Brecorder
