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Italy Money August 2018

Italy: Bond yields soar amid government’s plans for fiscal expansion

Italian bond yields have trended firmly upwards in recent weeks amid heightened political uncertainty coupled with fears of contagion from the financial crisis in Turkey. On 27 August, the 10-year bond yield stood at 3.17%, marking one of the highest results in over four-years. August’s result mirrored a spike seen in late May when the formation of a populist government jittered markets and resulted in a debt sell-off. Meanwhile, the yield spread between German and Italian 10-year bonds stood at 279 basis points (bps) on 27 August, as yield premiums continued to soar in recent weeks reaching the highs seen in late May. In addition, Italy’s bond yield spread with Spain also increased, illustrating Italy’s deteriorating risk profile as the economic and fiscal trajectories of the two countries diverge.

The kick-off of budget negotiations in August was behind the recent upward trend in bond yields. The populist government confirmed that it would be pursuing bold spending plans in the document, which sparked concerns that there could be a deterioration in Italy’s public finances. In addition, fears that Italy could clash with the E.U. over spending rules also weighed on sovereign bond yields. The budget bill is due to be submitted to the parliament by the end of September. The Italian government, however, offered some reassurance to investors in mid-August, stating that the stability of state finances and lower public debt had been identified as integral to its economic policy agenda. Nevertheless, maintaining fiscal discipline while also satisfying campaign promises will be a challenging exercise, and it remains uncertain if the government will accomplish it in the upcoming budget.

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