Italian bonds owe boost to Draghi easing pledge
Prospect of QE is bigger tailwind for debt than Rome sidestepping of EU budget clash
For investors in Italian debt, the round-trip is complete. Government bonds have climbed back to levels previously seen before the election that brought a populist coalition to power last year.
Borrowing costs had spiked in May 2018 after the government’s spending plans set it on a collision course with EU leaders. Italy’s 10-year yield rose as high as 3.5 per cent, in a worrying echo of the depths of the sovereign debt crisis.
That now feels like a distant memory. Italian 10-year yields have tumbled nearly 2 percentage points since October.
A cooling of the budget crisis has certainly helped. Italy avoided censure from Brussels last week over the size of its deficit after revising its ambitious spending plans. But the growing confidence in Italian debt arguably owes more to the shifting backdrop in global bond markets.
Bonds, particularly in the eurozone, have been on a tear since Mario Draghi, the European Central Bank president, suggested that fresh easing measures could be on the way to combat a weakening economy and low inflation, including a potential return of the bank’s bond-buying programme.
Italy, as one of the few major markets offering decent yields to investors, has been an outsized beneficiary.
“There’s no doubt that the budget deal amplified the move, but it started with Draghi,” said Frederik Ducrozet, strategist at Pictet Wealth Management. “It’s been a remarkable turnaround when you look at what was happening last year.”
But tensions between Rome and Brussels are unlikely to disappear altogether. Italy’s ageing population is a strain on finances, with pensions spending well above the EU average.
The freezing of expensive pension reforms in a bid to satisfy Brussels has already opened up cracks in the populist coalition. But with the ECB ready to revive quantitative easing, markets are unlikely to care too much.
“The market now feels it has this [QE] backstop. As long as that’s there, investors will go for the higher yields,” said Mr Ducrozet.