Italian Bond Rally Hits a Hurdle as Election Uncertainty Grows

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Italian Bond Rally Hits a Hurdle as Election Uncertainty Grows

Forex3 hours ago (Jul 19, 2019 12:30PM ET)

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(Bloomberg) — This week’s rally in Italian bonds has come to a halt on uncertainty over whether the country is heading for an election.

Benchmark 10-year yields jumped Friday, after falling to a three-year low Thursday, on a report that Deputy Prime Minister Matteo Salvini hadn’t decided whether to hold a snap election. The securities are still on their longest-winning weekly streak in five years as investors bet on monetary policy easing by the European Central Bank.

Salvini is seen as Italy’s most powerful politician following his League party’s strong performance in May’s European vote. President Sergio Mattarella wants him to make his intentions on an election clear in the next 48 hours, so that any new government can be in place by October to deal with the 2020 budget and deficit talks with the European Commission, according to an official.

“The uncertainty of a general election tends to make investors cautious, hence this knee-jerk BTP selling and spread widening,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc.

The yield on Italy’s 10-year bonds rose five basis points to 1.60%, widening the premium over its German peers by six basis points to 193 basis points. Yields have fallen for seven weeks, the longest streak since 2014.

Italian and Greek bonds have been leading the rally across Europe in the past month after ECB President Mario Draghi flagged possible further stimulus. The ECB meets to discuss policy next week. That means there are now plenty of “willing profit takers” after the run of gains, said Charles Diebel, head of fixed income at Mediolanum S.p.A.

“Many investors recently increased their exposure to peripheral European government bonds on the back of the prospect of ECB easing, expected to be delivered by September,“ said Martin van Vliet, a rates strategist at Robeco. “This bout of uncertainty affects conviction.”

(Adds comment by Martin Van Vliet in the seventh paragraph.)

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