Like we said earlier this week (and several times in the not-too-distant past), anyone who didn't anticipate the latest selloff in BTPs and position accordingly has only themselves to blame.
Italian yields continue to climb on Friday, with the two-year yield on track for its biggest one-day rise in two months, after the Bank of Italy warned that Italy's public debt could rise more than anticipated in 2019, the latest in a string of warnings by Italian and European institutions that the budget-deficit projections that formed the basis of last year's truce between the Italian populists and the European Commission were wildly off the mark.
The Bank of Italy warned on Friday that public debt could rise more than forecast by the government in relation to domestic output this year, and called for measures to cut Rome’s 2.3 trillion euro ($2.6 trillion) debt pile. (Reporting by Virginia Furness; Editing by Dhara Ranasinghe)
The Treasury denied that it planned to issue the mini T-bills to help repay public administration suppliers and creditors, according to a statement.
BTPs also suffered from President Trump's decision to slap tariffs on imports from Mexico, which hurt risk sentiment more broadly, Reuters reports.
Italy's two-year government bond yield jumped 16.5 basis points to 0.813%, its highest level in two weeks.
But yields trimmed their gains after the Italian Treasury announced that it has no plans to issue so-called "mini BOTs" - debt securities that some have warned would be tantamount to a "parallel currency", taking Italy one step closer to abandoning the euro. The notion was revived by Telegraph Business Editor Ambrose Evans Pritchard in a column on Thursday.
Meanwhile, Italy’s 10-year spread over Germany also hit its widest point since December at 293 basis points, before it also retraced some if its climb.
In another major development, an anonymous source purporting to speak for the Five Star Movement, one of the two parties in Italy's ruling populist coalition, told Reuters that the party will back League leader Matteo Salvini's plan to implement a "flat tax", which would cut taxes for millions of Italians. The tax cuts would be financed with a higher deficit. Yesterday, Salvini threatened to collapse the governing coalition if Five Star didn't go along with his plans.
"The League’s proposal to finance the flat-tax via a higher deficit finds us in agreement," the source said.
"Even more so if, as we are hearing, (Economy Minister Giovanni) Tria shares this idea: we welcome a regime with an income tax rate of 15 percent for people earning up to 65,000 euros (a year)."
The decision will further embolden Salvini just days after the League won a sweeping plurality of votes in the EU Parliamentary elections - which Salvini described as a popular mandate to pursue his agenda. To try and contain the ascendant populists, we imagine the ECB, other European institutions, and internationalist bond vigilantees will try to punish the Italians by jacking up borrowing costs - and the possibility that BTP yields will return to their highs from late last year, when the Italians were embroiled in a game of chicken with Brussels over Italy's proposed 2019 budget, is starting to look more like an inevitability.