Italy

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.

Investors moved to reduce their positions in Italian bank bonds after a leaked document on Tuesday night showed that the Five Star Movement and Lega parties were considering introducing a number of controversial policies should they enter into a governing coalition.

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.

News that populist parties in Italy could be positioning to defy Europe over spending and debt levels has rattled some participants, causing some to change their strategies with derivatives.

On Tuesday, Italian energy company Enel sold €1.25bn of new hybrid bonds to help fund the repurchase of its hybrids with 2019 and 2020 call dates. The buyback was announced after the firm’s chief financial officer announced that the company would refinance up to €3.5bn of hybrids at a cost of about 3.5%.

The resilience of Italy’s benchmark FTSE MIB index to the growing political risk in the country suggests investor sentiment towards Italy is still favourable. But Italian equity capital markets bankers are understandably nervous that the expected coalition government of the Five Star Movement and Northern League could change investors’ minds.

The Italian Obbligazioni Bancarie Garantite market has barely reacted to the growing probability that an anti-European coalition between the Five Star Movement and League parties could soon be announced. Even though OBGs are expensive relative to senior unsecured and sovereign bond markets, spreads could well hold steady unless there is a considerable improvement in supply.

Investors may be underestimating the chance of a Eurosceptic, populist government taking power in Italy, one expert on the country warned this week, as the Five Star Movement and Northern League on Thursday made strong progress on forming a coalition — without any mainstream parties. When the general election in early March failed to deliver a government, such a coalition was widely deemed the worst possible outcome for the market — particularly as one of the few policies the duo share is a looser fiscal policy.

Italy’s bonds took a hit on Wednesday afternoon after the country’s president Sergio Mattarella allowed the Five Star Movement and the Northern League — the best performing parties in the country’s general election in March — 24 hours to form a government before he appoints a non-partisan prime minister.

Investors are confident Italian spreads will stabilise after the sovereign widened versus Germany over fears of a potential second general election of the year. There was some evidence of that on Wednesday morning as the country’s yields reversed some of their losses.

Banco BPM and Banca IFIS found success in the senior unsecured market this week, despite an uncertain political backdrop in Italy after parties prolonged talks to form a new government.

Banco BPM sold €500m of senior bonds with a 'modest' new issue premium on Monday, against an uncertain political backdrop in Italy after parties prolonged talks to form a new government.