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What is Happening with Italian Bond Yields?

May 16, 2018

 

Yields on Italy’s sovereign 10-year bond finished up 16 basis points to 2.10% today -- the highest yield for the Italian 10-year bond since February 26th, 2018. The 16 basis points increase on the Italian 10-year is the largest single-day increase in the Italian 10-year yield since February 2nd, 2018 (when it rose from 1.95% to 2.11%). It is currently 0.9 standard deviations above the 1-year average rate of 1.97%. 

The spread between the German 10-year bund yield, considered the benchmark bond rate for Europe, and the Italian 10-year is now at 150 basis points. A 150-basis points spread is the largest differential between the German and Italian 10-year since January 2018.

Today, leaders of La Lega and the Five Star Movement suggested the idea of writing down nearly USD$300 billion in sovereign debt owed to the ECB. This news drove a “risk-off” sentiment for Italian assets, with rising bond yields coupled with a 2.32% decline in the FTSEMIB. It has been nearly four and a half months since Italian President Sergio Mattarella dissolved the Italian Parliament, and 10 weeks since Italy held general elections for the Chamber of Deputies and Senate of the Republic. YTD, uncertainty surrounding Italy’s economic agenda has been driven by the power struggle between Italy’s Five Star Movement and La Lega populist parties. 

Earlier this week, Five Star leader Luigi Di Maio and La Lega head Matteo Salvini announced that the parties were negotiating the formation of a coalition government. There are also rumors that the Five Star Movement and La Lega groups have collectively drafted plans to move Italy away from the Euro (EUR€). 

By the way, the yield on the US 10-year bond is at 3.10%: are you kidding? 

Sources for this post:
https://www.npr.org/sections/thetwo-way/2018/05/14/611037582/months-after-election-italys-populist-parties-seek-more-time-to-negotiate-coalit
https://www.ft.com/content/25f632d6-58ed-11e8-bdb7-f6677d2e1ce8
https://www.reuters.com/article/us-italy-politics-draft/5-star-league-want-ecb-to-forgive-250-billion-euros-of-italy-debt-draft-idUSKCN1IG3EM