Italy

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.

Uncertainty over Italy’s political future has sunk a second Italian IPO in a fortnight, as Estra, the Italian utilities company, decided to postpone its initial public offering until markets calm.

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.

High yield bonds have sold off as financial markets have been rocked by the collapse of Italy’s coalition government-in-waiting — but a deeper concern is that the real cause of the weakness is anxiety about Europe’s economy itself.

It’s hard not to feel sympathy for Italian president Sergio Mattarella, who felt obliged to reject the Five Star Movement and Northern League nominee for financial minister to assuage investor concerns, but the decision will likely strengthen Italy’s radical political forces.

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.

An escalation of political risk in Italy has rattled investors, substantially increasing hedging activity this week as concerns ramped up about the future of the eurozone.

Investors have been reducing their exposures to risk in financial markets this week, after Italian president Sergio Mattarella helped to set the country on a course towards fresh elections.

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.

As investors take shelter from the incoming Italian administration by selling the capital instruments of the country’s banks, one security outperformed this week. UniCredit’s convertible and subordinated hybrid equity-linked securities (Cashes) traded up at the beginning of the week as investors assess how likely it is that the bank will have to remove the instrument from its capital stack.