Italy

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.

Italian government bonds took a hit on Tuesday after the European Commission asked the country to send a revised draft of its budget plans. But yields stayed below the 2018 peaks they hit late last week when investors feared that Moody’s could downgrade the sovereign to junk.

Italy replaced €3.8bn of a short dated BTP Italia with longer dated conventional BTPs on Thursday, but against a backdrop where its bond yields were once again on an upward trajectory.

Italy will give investors the chance to swap out of its earliest maturing BTP Italia for longer dated nominal bonds on Thursday as it attempts to reduce the size of the €20.5bn issue. The deal comes amid a calmer backdrop for BTP yields than over the last few months — a factor that helped determine the timing of the exchange, said one of the leads.

In a month where volatility has shot down Europe’s IPO hopefuls, Italian plastics equipment manufacturing firm Piovan has managed to price its deal with an oversubscribed book.

Milanese pharmaceutical firm Recordati was out with its CVC buyout funding this week — a €1.3bn bond, in a European high yield market that has mostly ignored Italy’s political fights. But on Thursday, volatility went global and investors started pressing for concessions. Recordati went ahead regardless, and priced on guidance.

A debut sovereign green bond from Ireland and benchmark from a Spanish agency provided the firmest proof yet that the fiscal stink over Italy’s planned budget deficit has not put investors off other SSAs in the eurozone — even those that until recently were in the same ‘periphery’ bucket as Italy. But bankers are concerned that Italy’s standoff with the European Union has further to run — and that a BTP spread over Bunds of 400bp will be the breaking point.

Banca Carige has challenged a downgrade from Fitch, after the rating agency discussed the potential failure of the bank. The hard-pressed Italian lender also indicated that it had spoken to the European Central Bank about a merger.

The Milan listing of Piovan, the sole Italian IPO still seeking to be priced this year, is still going strong in the bookbuilding phase despite investors elsewhere fleeing Italian risk.

Investors in speculative grade debt are joining the discussion about the potential conflict over fiscal policies between Italy and the European Commission. But the leveraged finance markets are still keeping busy.

Corporate bond markets have enjoyed a good run since returning from the summer break. But for the first time since then, an external problem is causing turbulence. The Italian budget has become a live factor in market participation for buyers.

The Italian government’s economic growth expectations are likely to take a hit from “unintended tightening” of monetary policy if BTP yields keep rising, investors have warned.