Italy Backs Down: Yields Slide As Populists Cave On Deficit Target

Update: In a statement from the Italian economy ministry, Tria said he and the European Commission Vice Chairman Valdis Dombrovskis are looking to strike a deal on the Italian budget.

The upshot: Bullish budget talk is now coming from both sides.

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It's only Dec. 3, but international investors already have a lot to be grateful for this holiday season. In what was perhaps the most important development for global markets this weekend, President Trump and his Chinese counterpart, Xi Jinping, helped soothe investors' trade war fears by agreeing over the weekend to a truce - essentially a three-month detente in the US-China trade war that will put the next round of tariffs on hold while the two countries try to forge an agreement on some of the US's more contentious demands (like putting an end to IP theft by Chinese companies).

Conte

The deal inspired shouts of jubilation from Wall Street. But while sell side analysts were busy cranking out bullish sell-side notes with corny titles - as was to be expected, regardless of which way the Trump-Xi dinner broke...

... Italy has taken some serious strides toward calming fears about the "beginning of the end" of Europe by reportedly agreeing to work with the EU to lower its budget deficit target.

According to Bloomberg, Italian with a duration longer than 5 years climbed, sending yields to a two-month low, after the coalition government said it is ready to accept new budget deficit targets, according to Messaggero. Meanwhile, German bunds have pared losses which followed a trade truce between Presidents Donald Trump and Xi Jinping.

It was only weeks ago that Italian Deputy Prime Ministers Luigi Di Maio and Matteo Salvini, as well as the country's 'moderate' economy minister, Giovanni Tria, had claimed that capitulating to the EU would be tantamount to "suicide" for the Italian people. However, that position softened a couple weeks later when Salvini, followed by the rest of the Italian populist establishment, told reporters that Italy would consider a lower deficit target, so long as the populists could still pay for all of the generous social programs promised in their platform. After consulting with Prime Minister Giuseppe Conte, the populists said they were ready "to accept new targets", with Tria predicting that the EU will suggest a deficit of 2% rather than 2.4%. Such a number seems like a happy medium, that would allow the populists to save face (and preserve their popular mandate) while allowing the EU to crow about preserving fiscal discipline. Conte, who has emerged as the most moderate voice in the Italian government (even surpassing Tria in recent weeks), will lead negotiations with the EU, instead of Tria.

Though the yield on the Italian 10-year has climbed off its lows, it remains down 4.5 basis points on the day.

Italian

Last week, Italy's European peers took the first step toward punishing it as representatives from the EU governments agreed to back the European Commissions call for an "Excessive Debt Proceeding" against Italy. While any sanctions likely wouldn't materialize until the spring, the anxiety-inducing climb in Italian bond yields, and the ever-present threats of a downgrade from the world's ratings agencies, has apparently convinced the populists that it would be better for the country - if not politically advantageous - to try and avert a banking crisis.