Italian government debt hit by fresh sell-off
Yields hit highest levels since post-election crisis on concerns over budget talks
Italian government debt sold off sharply for a second day on Friday, hitting lows not seen since a post-election crisis in June as senior figures in the populist government prepared for talks on the country’s next budget.
The drop came as the leaders of the two parties in the governing coalition insisted the new budget must include a series of high-priced spending and tax cut initiatives — including unwinding pension reforms — that could further burden what is already the eurozone’s second most indebted government, after only Greece.
Luigi Di Maio, head of the anti-establishment Five Star party, is expected to press finance minister Giovanni Tria that policies the coalition partners campaigned on, including a flat tax, guaranteed basic income and a reversal of the previous pension reforms, must be included in the budget.
The yield on Italy’s two-year bond, which moves in the opposite direction to its price, rose 40 basis points to 1.353 per cent in Friday morning trade, after having risen by 17 bps on Thursday. The yield on 10-year paper was up 16 bps in early trading to 3.06 per cent, after rising 12 bps the previous day.
The move in the two-year yield is the biggest one-day rise since the height of the previous Italian bond sell-off in late May, when concern rose over whether the new government would include advocates of leaving the eurozone.
Shares in Italian lenders were also under pressure on Friday, leaving them as the worst performers across Europe’s banking industry. BPER Banca shed 2.4 per cent, Banco BPM declined 2 per cent, while Ubi Banca, Intesa Sanpaolo and UniCredit all fell more than 1 per cent.
Government officials said Giuseppe Conte, the prime minister, is due to convene a meeting with senior cabinet ministers later on Friday to discuss the budget, a session that is to include Mr Tria and Mr Di Maio.
Matteo Salvini, the deputy prime minister and leader of the far-right League party, the other coalition partner, said in a television interview the budget would include tax cuts and pensions reform. Mr Salvini’s presence at the budget meeting was not certain.
“The autumn budget will not immediately include everything in our programme but the first steps towards flat tax, the dismantling of the . . . pensions reform, getting rid of letters from [the state debt collector], these elements will be present,” Mr Salvini told Sky TG 24.
Seamus Mac Gorain, fixed income portfolio manager at JPMorgan Asset Management, said investors had initially expected “a period of calm in August” followed by volatility in the autumn as budget negotiations got under way.
But the public remarks by coalition leaders has sped up the process, Mr Gorain said, meaning the day of reckoning with the European Commission, which enforces eurozone debt and deficit rules, could come much sooner.
“The market is now positioning itself for the fight that investors anticipate between the Italian government and Brussels over fiscal expansion,” he said. “The level of volatility in the meantime will depend on how drawn-out the budget negotiations are.”
Short-dated Italian debt has been a popular carry trade for investors, who have sought to benefit from the additional yield it offers over the equivalent German bond. German two-year debt is in negative territory, yielding minus 0.6 per cent.
During May’s sell-off, the sudden price moves triggered many investors’ stop-loss ceilings — a way of capping the level of losses that investors are willing to bear — which forces an automatic sale if yields rise above a certain point.
This forced selling exacerbated the price falls, along with very thin liquidity which saw the Italian Treasury step into the market to act as a buyer.
At the time, the Treasury said it was buying back short-dated debt to use up spare cash but some experienced market observers suggested the move had helped to stabilise prices.
Credit rating agency Moody’s has put Italy on review for downgrade as a result of the political uncertainties and is due to publish its assessment of the country’s outlook early next month.