Italian Sovereign

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.

The political manoeuvrings in Italy’s path to being governed — as well as poor eurozone economic data — played havoc with rates this week, leading to SSA deals either paying higher new issue concessions, or falling short of subscription. More volatility could come, after the country’s president approved the likely coalition partners’ choice of prime minister but held back from appointing a eurosceptic economist to take charge of the country’s economy. Craig McGlashan reports.

Some investors are optimistic that Italy’s borrowing costs can recover following a rapid rise over the last few days as the spending plans of its likely new government came to light. But they also warned that the picture is rapidly changing — as evidenced by the apparent push-back this week by the Italian president against the proposed candidate for prime minister.

The pipeline for this week is swelling, according to an SSA syndicate official, but the focus may shift from last week's emphasis on euros to dollars.

Investors dumped BTPs this week as far from market-friendly plans emerged from talks this week between the Five Star Movement and the Northern League, which looked set to form a government as GlobalCapital went to press. But there were still some notes of optimism as Italy sold the latest line of its BTP Italia product with little fuss and bankers said BTP yields were still very far from crisis levels.

A populist coalition poised to take power in Italy sent shudders across markets this week, with the concerns going well beyond BTPs and Italian corporates to spill into other countries and raise questions over the future of eurozone capital markets unity. Craig McGlashan, Jasper Cox and Sam Kerr report.

Sometimes, investors get hit by political events that come out of nowhere. Other times, they walk straight into an oncoming freight train, even though it's blowing its horn at top volume.

Italy’s political situation may be making investors nervous but the sovereign this week sold the latest line of its BTP Italia product with little fuss — although the domestic skew on the bond makes it a poor barometer of international faith in the credit.

A leaked draft of a coalition agreement between Five Star and the Northern League, which are in discussions over forming a government in Italy, caused investors to dump Italian debt, blowing BTP yields out by 9bp.