Italy’s coalition government may have collapsed, but investors cannot seem to get enough of its bonds.
Italian debt has rallied this week despite the latest political crisis to hit Rome, pushing the 10-year bond yield to a three-year low just above 1.30 percent on Thursday. The yield had climbed as high as 1.80 percent two weeks ago when Matteo Salvini, leader of the rightwing League, said he planned to pull the plug on the country’s governing coalition. Two-year borrowing costs, which are highly sensitive to political instability, were at their lowest since May last year.
Investors are relaxed about the end of Mr Salvini’s alliance with the leftwing populist Five Star Movement, which has frequently clashed with the EU over the size of Italy’s budget deficit. But they are also betting heavily on a resumption of bond-buying stimulus by the European Central Bank, possibly as soon as next month.
“This is all about the ECB,” said Silvia Dall’angelo, senior economist at Hermes Investment Management, referring to the recent price rally. “More buying of sovereign debt will be a big boost to Italian assets, particularly government bonds.”
Analysts note that Italy’s yields stand out in a market where all German government debt, the eurozone’s benchmark safe asset, trade at negative yields and even former crisis hotspots such as Spain and Portugal have seen yields shrink towards zero.
“You get paid a decent premium to own Italy over Spain, and that’s in an environment where QE [quantitative easing] is coming back,” said John Taylor, co-head of European fixed income at Alliancebernstein. “You only need the political side not to totally unravel.”
Despite the turmoil in Rome, investors such as Mr Taylor are betting that will not happen. Five Star is currently in talks with the center-left Democratic party about forming a new coalition. Should those talks fail, new elections are likely, which could see Mr Salvini forming a government with other rightwing parties.
Either outcome would be more market-friendly than the current alliance, according to Lorenzo Codogno, a former chief economist at the Italian Treasury and founder of LC Macro Advisors. “The market is betting that with a change of government, things can only get better,” he said.
