(Bloomberg) — The Italian-German yield spread shot up by nearly 40 bps to 275 bps, the biggest one-day move since May when the populist government was formed. While investors are probably right to be nervous, the pessimism might arguably be overblown. This is something to be expected given the elections pledges. A few months ago, some were even talking about deficits as big as 6%-7% and risk of a euro exit. Neither of those have materialized.
But in the near-term, it will be hard to stand in the way of this outgoing high-speed train. Most investors are understandably worried. The compromise demolished Finance Minister Tria’s credibility, according to Christoph Rieger at Commerzbank (he closed long BTP from Aug. 30 last night).
“Having a lame duck finance minister in this situation will require a higher premium,” he said.
The current BTP-bund spread is just 15 bps away from a five-year high reached last month. Fidelity International said it sees the proposed budget as tantamount to throwing down a gauntlet to the EU and that’s not going to bode well for sentiment. Now, the spotlight has shifted to how the EU will respond.
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