Italian Sovereign

Italy carried out a syndicated buyback alongside a reopening of its October 2021 issue on Thursday, despite a steep sell-off in the sovereign’s curve throughout the day.

Speculation is rife in the government bond markets that the European Central Bank will deploy special monetary policy to support Italian BTPs. Aside from being a ridiculous idea — Italy has got itself into this mess with its own budget proposals, not because it is in a financial crisis — such support brings with it yet more rules that Italy would have to abide by in order to receive the help.

Italy’s 10 year yield dropped to its lowest level in almost two months this week, after the country’s top government officials suggested they could target a budget deficit as low as 2% in 2019.

Populist parties such as Italy’s Five Star Movement are winning elections on platforms of transparency, reducing waste and removing corruption. But the biggest waste of money in Italy this year has been the party’s futile budget standoff.

There was little appetite for Italian inflation-linked debt this week, as Italy issued just over €2bn for its first BTP Italia sale since the sovereign’s bonds began selling off in May.

Investors took up just over €700m during the first two days of the first BTP Italia sale since the Italian bond market sell-off began in May, leaving the sovereign heading for a volume far less than its target of €6bn-€8bn, according to buy-side strategists.

The Italian government’s refusal to make any concessions to the European Commission over its budget plans took investors by surprise this week, moving the 10 year BTP/Bund spread to its highest level since early 2013.

A mix of political, economic and market forces is “shaping up to be a perfect storm” for the eurozone debt markets, investors have warned.

Italy’s government bonds rallied to their tightest spreads versus Bunds since the start of the month after S&P opted to hold its rating for the country at BBB, while moving its outlook to negative from stable last Friday. But while there may be some respite for Italy in the weeks ahead, Germany chancellor Angela Merkel’s decision on Monday to step down at the end of her term in 2021 has left analysts fretting about the overall path of the eurozone.

The price of Italian bank shares and bonds rose on Monday morning after local media reported that the government was weighing up extraordinary measures to help the embattled lenders. The next few weeks are crucial for the banks, with the release of stress test results and third quarter earnings.

The European Central Bank made clear on Thursday that it will not be Italy’s doting aunt to the European Commission’s disciplinarian parent after the latter dumped the sovereign on the naughty step by rejecting its budget plans this week. Some investors warned that while Italy’s problems are contained for now, further antagonism between Rome and the eurozone’s authorities raises the risk of a junk rating for Italy and contagion to other markets.

Some investors are betting that Italian government bonds have suffered their worst losses and are hoping S&P will not downgrade the sovereign to junk at the end of this week. That is despite a spat between the Italian government and the European Commission over the former’s budget plans which saw the latter reject an EU member's budget proposal for the first time ever this week.