Italian Sovereign

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.

Investors are seeing the positives from last weekend’s Italian general election — despite a strong showing for populist parties and a hung parliament result — driving the 10 year BTP/Bund spread to a tighter point than it was before the vote.

The results of Italy’s general election on Sunday indicated swelling support for right wing populist ideologies in Italy, but the euro SSA market appears to have accepted the result with equanimity, although only one borrower has popped its head over the parapet so far.

An awful lot of capital and financial market participants are relaxed about Sunday's Italian election, predicting that coalitions and deadlock will remain a staple of Italy's political system. But others urge caution — and hedging — while the going is good for fear that complacency is taking hold, writes Costas Mourselas.

The issues surrounding Italy’s debt burden refuse to go away, but not all market participants believe that a change of government on Sunday would be able to stall or reverse the country’s recent economic progress.

Italy could retrieve half of the basis points it has lost to Spain in the run-up its general election next weekend — if the vote returns the most market-friendly result, according to a portfolio manager at a leading investment house. Spain, meanwhile, printed a 30 year benchmark with the second largest book ever for a euro sovereign deal in the tenor — another sign that the country is marching towards or already at semi-core status, said bankers.

Italy could retrieve half of the basis points it has lost to Spain in the run-up its general election next weekend — if the vote returns the most market friendly result, according to a portfolio manager at a leading investment house.

The euro market is taking a breather as a frenetic January draws to a close. But one borrower hit screens and launched a deal on Wednesday, while the European Financial Stability Facility (EFSF) sent out a request for proposals for next week.

Rating: Baa2/BBB/BBB

Italy and Portugal showed this week that any concerns about the pace of eurozone quantitative easing halving to €30bn from January were overdone as they each built their largest ever benchmark books. Italy’s trade was particularly notable, as it was the last syndication by its retiring head of funding — and market stalwart — Maria Cannata.

A combined €48bn of cash swelled the orderbooks for Italy and Portugal’s deals on Wednesday, dispelling any fears that the reduction of the European Central Bank’s quantitative easing programme would hamper demand.

January’s impressive pipeline of sovereign issuance is starting to unload, as Italy and Portugal hit screens on Tuesday for their first syndications of the year.