Italian Yields Tumble Below 3% As Populists Cave On Deficit Target

Update: Just as we anticipated, the Italian government has denied reports that it caved on the budget deficit. The euro and Italian stocks are fading on the headline, while BTP yields have reversed some of their earlier drop.

  • ITALY PM OFFICE DOES NOT CONFIRM 2% DEFICIT TARGET: OFFICIAL

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After insisting that they wouldn't lower their projected budget deficit past 2.1%, Italy's populists have reportedly ceded even more ground to the EU according to reports that they are preparing to submit a revised budget proposal featuring a 2% deficit target, putting it in line with a number that EU officials have said they might be willing to accept.

The headlines triggered a torrid rally in the euro and Italian bonds, causing the spread between 10-year BTPs and bunds to collapse as the BTP yield broke below 3% for the first time since September (which puts the 10-year BTP yield below the 10-year Treasury). In recent trade, the 10-year yield was down 13bps to 2.99%, while the two-year dropped 19bps to 0.47%.

BTP

September

The euro shot to session highs on the news.

EURUSD

Meanwhile, Italy's FTSE MIB climbed 1.7%, lead by with UniCredit and Intesa, up 3%, and other bank stocks.

Italy's latest concession follows French President Emmanuel Macron's announcement that he would impose a round of fiscal stimulus of his own that could blow out the French budget deficit past the 3% red line mandated by EU rules. Many analysts said they expected this to give Italy more leverage in negotiations with the EU.

"It will be difficult for the EU to really go hard at Italy next year" with France also breaking fiscal rules, said Jens Peter Sorensen, chief analyst at Danske Bank. "Italy has been bought a few extra years."

Which begs the question: Why now? If previous headlines about the negotiations have taught us anything, we'll keep an eye out for the inevitable denial...