A political rally in Florence last week ahead of the regional elections. With the risk of political instability having eased, Italy’s borrowing costs now stand at historic lows
A political rally in Florence last week ahead of the regional elections. With the risk of political instability having eased, Italy’s borrowing costs now stand at historic lows © AFP via Getty Images

Italian government bonds pushed to record highs on Wednesday, continuing to rally as investors bet that the outcome of regional elections earlier this week has diminished the prospect of a fresh bout of political instability.

The 10-year Italian government bond yield fell to 0.77 per cent — reflecting a rise in price — just below the previous trough in September last year, according to data from Tradeweb. The 30-year yield also touched a record low of 1.75 per cent.

The gains come after Matteo Salvini’s rightwing populist League party failed to make a breakthrough in Italy’s traditionally leftwing regions, which would have raised the prospect of snap national elections. Now, Rome’s borrowing costs stand at historic lows despite the unprecedented economic slump sparked by the Covid-19 pandemic.

“The risk of an early election has been removed,” said Annalisa Piazza, fixed-income research analyst at MFS Investment Management. “That means the government can concentrate on measures to support the economy through the pandemic.”

The latest bond move brings Italian markets closer into line with peers in the eurozone, where the European Central Bank’s €1.35tn asset purchase programme launched in the wake of the coronavirus outbreak has pulled yields in many countries to record lows. 

The gap between Italy’s 10-year yield and Germany’s — a closely watched barometer of political risks in the euro area — has shrunk to less than 1.3 percentage points, the tightest level since May 2018, when the League’s entry into a governing coalition with the Five Star Movement rattled markets.

The gap had surged to more than 3 percentage points in March as investors worried that the economic fallout from the pandemic would lead to an unsustainable surge in borrowing by the Italian government.

The size of the rally since the regional elections suggested investors had been waiting for the green light to shift back into Italian debt, said strategists at Rabobank. “The market is reticent to go short the country given the purchases of the ECB but is happy to jump on triggers to go long,” they said.

Italy, which has the eurozone’s largest bond market, is difficult for investors to ignore, given that it provides the majority of the positive-yielding government debt in the bloc. All of Germany’s bonds — which serve as the euro area’s benchmark safe asset — trade at sub-zero yields, as do French bonds up to 15 years in maturity.

“There are a lot of investors who need to get some yield into their portfolios, and there’s nothing else in the eurozone that offers it,” said Ms Piazza. “The short-term political stability gives them some comfort in going for it.”

Purchasing managers data on Wednesday showed that growth in business activity in the eurozone ground to a halt in September, adding to concerns that rising infections and tightening coronavirus restrictions are choking off the recovery.


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