Farewell To An Old Friend
Our attention this morning was grabbed by a headline from Italy’s La Stampa, which reported that Finance Minister Giovanni Tria is preparing a 2019 budget that will result in a 1.5% deficit/GDP ratio for the indebted EU nation. This would be a positive development as it would keep Italy within the EU’s 3% deficit rule and allay fears that the new Italian coalition were going to antagonise their EU partners by extending their debt burden, risking another EU sovereign debt crisis in the process.
If the report is true, it should be hugely positive for Italian government bond yields. But BTPs have barely moved this morning, so why is this?
La Stampa did not say where its information came from, though given it is one of Italy’s older and better-regarded journals, distributed in many European countries, there is likely to be a reasonable degree of substance to the story. Therefore, it is fair to assume that if Tria was happy to leak this information, it’s either because he has the support of the two Deputy Prime Ministers, Salvini and Di Maio, in which case it’s a bit surprising there haven’t been more details released, or on the other hand, he doesn’t have their support and is trying to force the issue. The latter option could result in him being fired or resigning, a result that certainly would not be supportive for BTP yields.
It’s probably not a surprise investors are being cautious before jumping in to support Italian govvies again, but looking at the yields on offer (1.3% for 2yr, 2.5% for 5yr and 3.2% for the 10yr) these are extremely attractive for a country whose debt is still being purchased by the ECB. Also, remembering you get a pick-up of around 120bp when hedging into sterling and around 265bp when hedging to dollars, that gives a two-year yield of 2.5% (£) and almost 4% ($). Investor sentiment is certainly very balanced right now as we would expect for such a digital outcome!
The other part to the La Stampa story was that Tria apparently asked Salvini and Di Maio to be more prudent with their comments – anyone with Italian exposures will certainly be echoing those comments.