Italy’s Bonds Face Risky Political Scenarios After Conte Address

Italy’s Bonds Face Risky Political Scenarios After Conte Address

The political scenarios that could emerge from Italian Prime Minister Giuseppe Conte’s address to parliament Tuesday are unlikely to be good for the nation’s bonds, according to Citigroup Inc.

There is a growing probability that an alliance between the Five Star Movement and the center-left Democratic Party, or PD, could thwart a bid by Deputy Prime Minister Matteo Salvini to claim the premiership. While that should be good for Italian bonds, the fragility of any pact could limit a potential rally, Citigroup said.

Investors are worried about Salvini’s plans to boost spending that could see renewed conflict between Rome and Brussels over the nation’s budget deficit. Italy’s bonds slumped earlier this month after his move to push for elections, before recovering, still leaving them lagging a global debt rally.

Conte’s appearance in parliament could lead to a confidence vote which, if he loses, could presage the forming of a new government or snap elections. Salvini’s League party is currently leading in the polls, but Five Star and PD could avert Salvini winning power if they were to join forces, something that was previously seen as being highly unlikely.

“If an election is avoided, either coalition option looks hard to sustain while a snap election that produces a combative Salvini-led government is not obviously positive for BTPs,” wrote Citigroup strategists led by Jamie Searle in a note. “So while BTPs still look appealing to the yield-hungry, the ‘catch-up’ trade may struggle to regain momentum whatever happens.”

Citigroup expects the 10-year yield spread over Germany, key gauge of risk in the country, to hold above 190 basis points, with a bias for widening. It rose to 215 basis points Tuesday, having touched 179 basis points last month, the lowest level in over a year.