Italian Sovereign

The pipeline for this week is swelling, according to an SSA syndicate official, but the focus may shift from last week's emphasis on euros to dollars.

Investors dumped BTPs this week as far from market-friendly plans emerged from talks this week between the Five Star Movement and the Northern League, which looked set to form a government as GlobalCapital went to press. But there were still some notes of optimism as Italy sold the latest line of its BTP Italia product with little fuss and bankers said BTP yields were still very far from crisis levels.

A populist coalition poised to take power in Italy sent shudders across markets this week, with the concerns going well beyond BTPs and Italian corporates to spill into other countries and raise questions over the future of eurozone capital markets unity. Craig McGlashan, Jasper Cox and Sam Kerr report.

Sometimes, investors get hit by political events that come out of nowhere. Other times, they walk straight into an oncoming freight train, even though it's blowing its horn at top volume.

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.

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.

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.

Despite the political risk surrounding the formation of the Italian government, one asset manager believes its debt is better value than that of some of its peers in the peripheral Europe.

As negotiations over the future of Italy’s government begin in earnest, investors appear to be betting that political risk for the country has been overestimated.