From Hung Parliament To BTP Sell Off: JPM Says To Expect A 40-100 Bps Rise In Italian Bond Yields

Tyler Durden's picture


Today's stunning comeback by Berlusconi, which is really a slide in support for Bersani and Monti whose joint coalition government is unlikely to have the 158 seats needed in the Senate to avoid elections in a few months, means the "Plan B" aka "worst" outcome is in play. How "worst"? In a note released over the weekend, JPM strategist Gianluca Salford attributed a tiny 15-20% probability to an outcome that now appears to be the base case. A far more likely result (defined by JPM as 75%) would have been a continuation of the status quo, which saw an easily-formed Center Left government. As of this moment, that no longer appears feasible. So as the next steps play out, the fulcrum security will be Italian BTPs, which according to JPM will be whacked to the tune of 40 to 100 bps (at least to start), and with deleveraging feedback loops picking up after, who knows where this will end, especially in a worst-er case scenario where there will be months of political and social uncertainty in Italy.

From JPM:


In our baseline scenario (75% probability), a centre-left plus centre government with a solid majority in both houses is likely to push 10Y BTPs to the 4.00% area (Exhibit 1), in the following days. In the baseline scenario, the most important variables to watch are the strength of the combined majority and the balance of power between centre-left and centre. We believe that the strength of the majority will be a market positive, whereas, based on our estimates, Monti’s limited political appeal is unlikely to boost market sentiment.


In the case of an outright centre-left majority in both Houses with the explicit refusal to enlarge the coalition to Monti’s centre (5% probability), we expect little change compared to current levels. The failure by the centre-left (even with the support of the centre) to reach a majority of seats in the Senate (5% probability) would force tortuous negotiations to extend the majority to other parties and would not be welcome by financial markets, pushing yields, at least initially, up around 40bp.


The most negative outcome (15% probability) would be a centre-right victory in the Chamber due to the political uncertainty related to the need to forge a majority in the Senate. We expect discussions between the centre-right and centre to be complex and, in addition, we see a high risk that the coalition would have to be extended to the centre-left. The initial reaction might be in the order of up to 100bp, although we expect pressure from the President of the Republic and from financial markets to eventually lead to the creation of another Grand Coalition. We expect 10Y Bunds to move with a beta of roughly -0.25 to changes in BTP yields. Weighting the scenario, the direction is for a modest decline in BTP yields and a touch higher Bund yields, but we reiterate that we do not see much value in prepositioning.

In retrospect, perhaps one should have "prepositioned."

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Mon, 02/25/2013 - 14:23 | 3274499 redpill
redpill's picture

A well hung parliament?  Silvio will like this!

Mon, 02/25/2013 - 14:26 | 3274506 Edward Fiatski
Edward Fiatski's picture

Ah, but you see - it is him, who makes it hung, otherwise they're just limp, pencil-dick bureaucrats.


Mon, 02/25/2013 - 14:30 | 3274514 ZippyBananaPants
ZippyBananaPants's picture

Im sure the evening news will slip this important info somewhere in between reporting on our first lady delivering the results for best picture, and how much someone got offered for a piece of the russian metor.  Both of which will have huge implications on our lives going forward!

Mon, 02/25/2013 - 16:01 | 3274790 Freddie
Freddie's picture

If you do not go along with Goldman, the EUSSR and serfdom - we will downgrade your bonds, bankrupt your country and put you in poverty.   Bankster families - evil.

Mon, 02/25/2013 - 14:23 | 3274500 hugovanderbubble
hugovanderbubble's picture

GENERALI is in freaking default...HEDGE FUNDS ATTACK no mercy.


Italian and Spanish Bonds must rise up to 11%

Mon, 02/25/2013 - 14:40 | 3274543 bank guy in Brussels
bank guy in Brussels's picture

Re Italian and Spanish bonds

Before their yields go very high,

Italy could well leave the euro and re-denominate them into Lira

Spain will follow not very long after that

This is a turning point ... When the euro-zone started to break up

Thank God at last

Euro should be going up because a northern-only Germanic euro will be much stronger

Mon, 02/25/2013 - 14:25 | 3274501 Super Broccoli
Super Broccoli's picture

in other words : "we'll short you till you surrender"


would i be Silvio i'll just sign an executive order to drone US bankers (apparently it's allowed for Obamako so why not for Bunga Bunga ?)

Mon, 02/25/2013 - 14:24 | 3274502 nobusiness
nobusiness's picture

No one coul dhave seen it coming!

Which begs the question why these guys make millions

Mon, 02/25/2013 - 14:27 | 3274508 falak pema
falak pema's picture

there have been people who have said on the Hedge that the two biggest short term unknowns were the Ital elections and the US Sequester. They could both have profound effects in the coming months.


Mon, 02/25/2013 - 14:25 | 3274504 falak pema
falak pema's picture

watch those HF sharks attack the Italian whale; belly up for many months.

Mon, 02/25/2013 - 14:26 | 3274507 jubber
jubber's picture

BTP futures fell from 11423 to 11070 at close just today

Mon, 02/25/2013 - 14:27 | 3274511 Sandmann
Sandmann's picture

Will Obama call and congratulate Berlusconi ?

Mon, 02/25/2013 - 14:34 | 3274524 Super Broccoli
Super Broccoli's picture

what about he's goes back to shithole Kenya and run for presidency of a country used to massive inflation, money printing, false promesses, dictartoship, violence and oligarchy ????

Mon, 02/25/2013 - 14:31 | 3274519 buzzsaw99
buzzsaw99's picture

Hey Italy, watch out for the nyc fat tail whale.

Mon, 02/25/2013 - 14:32 | 3274520 Lost Wages
Lost Wages's picture

Have porn star, Rocco Siffredi, and his American friend, John "The Buttman" Stagliano, ever attended one of the Bunga Bunga parties? We need a sex tape leak.

Mon, 02/25/2013 - 14:35 | 3274532 Piranhanoia
Piranhanoia's picture

I smell fear

Mon, 02/25/2013 - 14:41 | 3274544 Haus-Targaryen
Haus-Targaryen's picture

I hope it starts raining bankers in Italy.

Mon, 02/25/2013 - 14:46 | 3274558 Banksters
Banksters's picture

I've read snippets that the president of Italy plans on changing to election laws to favor the pro eu candidates by scrapping the electoral vote.

Mon, 02/25/2013 - 16:32 | 3274921 20-20 Hindsight
20-20 Hindsight's picture

Everyone can keep joking about it, because the situation in Italy is beyond ridiculous.  What the fuck is wrong with the Italians?  How is it possible that they allow Bunga-Bunga's comeback?  This is economic suicide. This is going to be a lot of fun...

Mon, 02/25/2013 - 16:37 | 3274935 Uskatex
Uskatex's picture

You don't understand Italia politics!

Berlusconi's goal was to be indispensable to form a Senate majority, and he got it! So he can save himself from jail and from having his assets decimated. A new election in a few months would not be useful for him, because miracles seldom repeat themselves.

So, my bet is that, uder a severe attack from "foreign investors" and consequent spike in Italian bond yield and CDSs, Napolitano will step in, "convincing" Berlusconi to make a national safety government with Bersani and Monti, as he did 15 months ago. Berlusconi cannot refuse - remember he is a mason, and moreover he has too many things to hide.

The only good thing is that we will have for the first time in many years a true opposition - Grillo's M5S movement.

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