Italian bonds and stocks surged, with the euro rallying, after Finance Minister Giovanni Tria made assurances that the country would stay committed to the shared currency.
Stocks headed for the biggest gains since February after Tria told the Corriere della Sera newspaper at the weekend that there was “no discussion” of any proposal to leave the common currency and that the government would also block any market conditions that would “push toward an exit.”
“This is the one of the first references on not letting the fiscal plan getting out of hand, and that the government will not let the BTP-bund spread get to the same wide level as back in 2011-2012,” Arne Lohmann Rasmussen, a strategist at Danske Bank, said in emailed comments. “We expect to see some stabilization in the BTP-bund spread.”
Investor concerns in Italy have centered around the country’s future in the euro area after the Five Star Movement and the League — two Euroskeptic parties — formed a coalition, blowing out the premium demanded by investors to hold its bonds. The two new parties have also pledged to boost spending and introduce a flat tax for families and corporations, which is expected to cost over 100 billion euros ($118 billion) in its first year.
Tria also told the newspaper that:
- The government will seek an EU accord that would allow the exclusion of infrastructure investment costs from the budget deficit
- A review of legislation on co-operative and small banks isn’t a priority
- He can’t provide targets for growth and deficit before September
- The much-discussed mini-BOTS issuance would only shift the problem down the line; the best way to deal with the issue is to ensure that payments are made on time and in cash
The extra premium investors demand to hold the nation’s 10-year securities over similar-dated German notes narrowed 31 basis points to 237 basis points, having touched 323 basis points last month, a five-year high. The yield on Italy’s two-year bonds fell 50 basis points to 1.15 percent, while the rate on 10-year notes declined 29 basis points to 2.84 percent.
The euro climbed 0.3 percent to $1.1809. Italian shares jumped, with the FTSE MIB Index rising 2.4 percent led by Intesa Sanpaolo SPA and Banco BPM SPA. The benchmark had dropped 2.3 percent since the start of year through Friday.
Financial bonds were led by insurer Assicurazioni Generali SpA, which holds more than 60 billion euros of Italian government debt, with the price tightening by 10 basis points. Five-year bonds of banking heavyweight UniCredit SpA also up more than half a point to 95 cents, while Intesa Sanpalo SpA led a rally in senior financials’ credit-default swaps, tightening nearly five basis points to 181.
Not all were convinced that Tria’s comments warranted such a large push higher, given the challenges the new government’s fiscal program may pose to the country’s finances as debt stands at around 130 percent of gross domestic product. Santander GCB rates strategist Luca Jellinek posited that much of the move may have been due to short positions being squeezed out.
“There were a lot of shorts in Italy,” he said in emailed comments. This rally is “way too much.”
— With assistance by Macarena Munoz Montijano, and Tasos Vossos