© Bloomberg. The Vittorio Emanuele II, also known as the Altare della Patria, top left, stands beyond rooftops in Rome, Italy. Photographer: Giulio Napolitano/Bloomberg

(Bloomberg) — A rally in Italian bonds shows anxiety among the country’s investors might be turning a corner.

The yield on two-year securities fell to the lowest level in almost six weeks on Monday after Finance Minister Giovanni Tria added to reassuring signals that the country’s budget talks will adhere to European Union rules. His remarks led Morgan Stanley (NYSE:) and NatWest Markets to expect further bond gains as the worst of Italy’s fiscal risk might be over in the short term.

Morgan Stanley sees Italy’s budget shortfall at around 2.2 percent of gross domestic product — well within the 3 percent limit set by the EU — and says investors should buy Italian 10-year bonds, selling similar-maturity Spanish securities. NatWest Markets thinks it’s time to consider “aggressively long” positions in the nation’s five-year bonds as market sentiment improves.

“There’s a lot of risk still priced into BTPs, so given the more constructive tone on fiscal policy coming from the Italian government there should be scope for further spread tightening over the short term,” said Michael Ingram, chief market strategist at W H Ireland Ltd.

The yield on benchmark 10-year securities fell 13 basis points to 2.90 percent, following a 20-basis-point drop last week. The spread over similar-maturity German bunds narrowed 14 basis points to 2.50 percent, the lowest in a month.

Stocks Advance

Italy’s outperformed regional equities on the back of the bond moves to gain 2.3 percent, led by banks. The policies discussed by the new populist government have weighed down Italian stocks, taking the FTSE MIB from being the best-performing index in Europe to the second worst as their spending plans raised investor concerns.

READ  6 energy-efficient home upgrades that can save you $1,000 a year

The government in Rome is expected to set new public-finance and economic-growth targets by Sept. 27 and present them to parliament. This will be followed by the draft budgetary plan, which must be submitted to the European Commission by Oct. 15. The budget law has to be sent to parliament by Oct. 20, with final approval expected by year-end.

“As long as the Italian economy remains on a low growth trajectory, the tension between debt reduction aspirations and fiscal pump-priming can only increase,” Ingram said, adding this could lead to renewed volatility in the debt in the longer term.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





READ SOURCE

WHAT YOUR THOUGHTS

Please enter your comment!
Please enter your name here