Italy’s bond markets may be underpricing the risk of the nation having to restructure its debt, Bloomberg News reported. Credit default swaps, which protect investors against the nation failing to pay off its debts, suggest that Italian debt securities are still too expensive, according to NatWest Markets. To counter that, investors should place a curve flattening trade, betting on short-dated bonds selling off more than those further out, it said.
Italy
Italy’s government late Monday approved a draft budget law for next year, confirming a set of expansionary measures that could lead to a fast-rising deficit and a conflict with the European Union, The Wall Street Journal reported. The government, a coalition of the antiestablishment 5 Star Movement and the far-right League, has rattled financial markets in the past month with its budget plans, with investors demanding significantly higher interest rates to buy the country’s bonds. The full draft budget law will be sent to the Italian parliament by Saturday.
A major eurozone country has elected new leadership on promises to loosen the purse strings in defiance of bond markets, Berlin and bureaucrats in Brussels. The message to Chancellor Angela Merkel, Europe’s most powerful leader, is uncompromising: “People have made a choice which envisages a renegotiation of the fiscal treaty. It’s not Germany that decides for the whole of Europe.” These are not the words of Italy’s populist leaders preparing to send a rule-breaking budget to Brussels, the Financial Times reported.