Italian bond yields fall, investors are nervous after the rejection of the EU budget

LONDON (Reuters) – Italian bonds rallied on Wednesday, bringing yields down two years by up to 23 basis points, as markets ruled out the European Commission's rejection of Rome's budget proposal and put it on hold. 39, emphasis on the possibility of a compromise between the two parties.

Deputy Prime Minister Matteo Salvini refuted an article in the newspaper La Stampa that he was willing to examine the deficit of 2.4% of GDP for 2019 in 2019, while stating that other aspects of the budget could be discussed.

Prime Minister Giuseppe Conte said he was worried about the extent of Italy's ties to Germany and the government's willingness to react with reforms.

The 10-year Italian-German bond yield spread narrowed to 313 basis points after widening to 335 basis points on Tuesday DE10IT10 = RR. It has more than doubled this year.

"It is obvious that the Italian reports suggest that adjustments will be made to the budget in due course," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

"I do not think there will be substantial changes but we had a big sell yesterday, so there is a better mood around the bond markets today."

The European Commission has stated that the Italian budget does not comply with the criteria for reducing the EU debt and that an excessive deficit procedure is justified.

While the EUR = euro has briefly become negative and that the .FTMIB index of Italy 's benchmark index has hit a trough in the news, the markets are getting worse. are quickly straightened. Italian banks' shares rose 2.5% the same day. Bond yields have prolonged their slide.

"We know how negotiations work in Europe and in this case, the most likely outcome is that both sides have agreed on a compromise," said Jonas David, strategist at UBS Global Wealth Management. "We can see other negative titles, but at this point, we have to read a bit between the titles."

The yield on two-year Italian bonds fell 23bp to 1.15%, its lowest level in almost two weeks, while the 10-year bond yield dropped 13bp to around 3.49%. %. IT10YT = RR.

Yields were set for their largest daily decline in the space of three weeks, with risk sentiment improving globally helping equity markets stabilize.

Italian bond price increases also followed Tuesday's heavy losses, due in part to a sale of retail debt securities "BTP Italia" in which small investors had recovered only 723 million euros (824 million euros). dollars) Monday and Tuesday. The previous sale had received 3.7 billion euros of orders in the first two days.

SKEPTICAL

Many remain skeptical about a sustained Italian recovery, noting that Rome has made no significant changes to the revised budget submitted to Brussels.

"We do not think they will move much. There may be a word with the Commission, but Italy will still have a deficit of 2.4%, "said Lyn Graham Taylor, Rabobank's rate strategist.

For his part, Andrew Balls, director of global fixed income investments at PIMCO, said the possibility for Italy to default on its debt is unlikely, but can not be totally ruled out.

With the fall in Italian yields, the Greek bond market recovered slightly after the strong sell-off in the previous session, with five-year yields down 3 basis points GR5YT = RR.

They had already reached their highest level in more than two months, under the pressure of renewed concerns about the Greek banking sector and the contagion of Italian volatility.

The Commission said Wednesday in Athens that it was necessary to accelerate the implementation of reforms.

The rise in riskier euro-zone bonds weighed on the demand for safer debt, with German 10-year yields rising by 2 basis points to 0.37% DE10YT = RR.

Chart: Italian bond yields fall – tmsnrt.rs/2R2kqHR