Italian Yields Hit Six-Week High, Bund Yields Fall on Trump

Italian government bond yields hit a six-week high on Monday before Italy’s Constitutional Court reviews the country’s disputed election law, in a hearing that could impact the timing of the next election.

France’s 10-year bond yield touched a one-year high after it launched its first “green” bond, while safe-haven German yields fell as U.S. President Donald Trump’s inauguration speech on Friday injected uncertainty into world markets.

In Italy, caution crept in before Tuesday’s hearing.

Italy has different electoral laws for the upper and lower houses of parliament which President Sergio Matteralla says must be harmonised before a national vote can be held.

An unambiguous ruling offering a simple solution could open the way for an early ballot by June. A more convoluted reading would leave Prime Minister Paolo Gentiloni in charge until the legislature ends in early 2018.

Gentiloni took power last month after voters rejected constitutional reforms in a referendum, prompting Matteo Renzi to step down as premier and triggering calls from many party leaders for a snap election.

Italy’s 10-year yield rose 3 basis points to around 2.06 percent, a six-week high. That pushed the gap over German yields to 171 bps, its widest since early December. The Italian/Spanish 10-year yield spread widened to 54 bps, closing in on its widest levels in almost five years.

TRUMP UNEASE

Germany’s 10-year yield fell 2 bps to 0.34 percent , below Friday’s one-month high of 0.36 percent after the tone of Trump’s inauguration speech undermined optimism over the U.S. economic outlook.

Expectations Trump will deliver policies such as tax cuts and increased infrastructure spending that would boost the economy and inflation have on the whole pushed global bond yields higher since November’s election.

But Friday’s “America First” inauguration speech has raised some concern about the priority such policies will take, leading investors to rethink reflation trades.

“Even Treasury yields are down… as investors worry about protectionism and what a deeply unpopular president will mean for national unity and international diplomacy over the next four years,” said City Index research director Kathleen Brooks.

Elsewhere, French yields touched a one-year high at around 0.92 percent after France launched its first green bond, with a maturity of 22 years.

There was also focus on presidential elections this year after Benoit Hamon, a former Socialist government rebel, won the first round of a primary on Sunday.

The Socialists’ final choice on Jan. 29 could have an impact on the election fortunes of the front-runners for the Elysee – conservative Francois Fillon, far-right leader Marine Le Pen and popular independent Emmanuel Macron.

Polls indicate Fillon is most likely to win if he faces Le Pen in a May 7 head-to-head, but Macron is attracting large crowds to rallies and could upset the balance.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell