Italy’s fresh political crisis has left investors contemplating how to trade its sovereign bond market which has seen significant volatility over the last few months.
”(It’s) close to impossible to make political predictions. The situation is very unusual, (there’s) no precedent,” Francesco Papadia, a senior fellow at the think tank Bruegel and former official at the Bank of Italy, told CNBC’s “Squawk Box Europe” Wednesday.
Rome’s two-party coalition came to an abrupt end Tuesday after Prime Minister Giuseppe Conte resigned from his post following pressure from the right-wing Lega party. President Sergio Mattarella will hold consultations with various parties in Parliament in the coming days to see whether there is a working majority which would avoid the need for fresh elections.
Amid the uncertainty, Florian Hense, an economist at Berenberg bank, has detailed how bond markets could react to certain political developments. His predictions track would could happen to the gap between the yields on Italian and German government debt. This spread known as a “fear gauge” by European investors and specifically looks at the difference between 10-year yields on these fixed-income assets. The spread was at 209 basis points in early afternoon trade Wednesday, compared to 330 basis points in November.