Italian Sovereign

Quantitative easing, perhaps the single most important factor affecting bond prices over the past three years, could be coming to a long awaited end this year. Members of the European Central Bank governing council seemed to hint as much this week, causing govvie spreads to gap wider, writes Lewis McLellan.

The Basque Government this week gave one of the best signs that investor worries about Italy’s political situation are unlikely to spill over to other countries as it printed a three times subscribed debut sustainability bond.

European government bond yields have climbed in the wake of an unusually hawkish turn in the tone of comments from members of the European Central Bank's governing council.

The political upheaval in Italy is already making US investors go cold on European risk, which could magnify the market disruption Europe is likely to face in the coming months. The effects are even changing expectations on US monetary policy.

Government bond yields and swap spreads suffering a state of vibrato from the political fugue in Italy this week led to near silence across the primary public sector bond market. But issuers are hopeful a period of relative calm late in the week will last — although they admit investors are holding the baton.

Investors and analysts are assessing Italian banks in light of the fall in their capital ratios resulting from their exposure to sovereign debt.

Jitters over Italy’s political turmoil receded slightly on Thursday, giving Asia’s stock and bond markets a bit of respite, even as talk of a trade war between China and the US reappeared.

Italy passed its first debt raising test since its yields blew out earlier in the week amid fears of another round of elections, as it auctioned bonds near the top end of its target volume range on Wednesday. But the sale did show the elevated borrowing costs the country faces.

Fears over Italy’s political woes spilling over into a full-blown eurozone crisis eased on Wednesday morning, as investors welcomed news that another round of elections could be avoided.

Jitters around Italy’s political turmoil made its way to Asia’s bond and stock markets on Wednesday, forcing debt capital markets bankers in the region to hit the pause button on deals.

The violent moves in Italy’s curve since its president blocked the formation of a populist government may well be a sign of things to come, as government bond markets adjust to the post-crisis world of dwindling bank balance sheet support — and no central bank help.

Bond market havoc following the Italian president’s decision to appoint a technocratic government has shut the euro market for most public sector borrowers. Volatile swap spreads are making issuance near impossible, while an “enormous” flattening in Italy’s curve is of particular concern for that sovereign, said one head of SSA syndicate.