Recent discussions regarding looser fiscal policy in Italy have exacerbated volatility in the bond market, leading to an increase in the yields of Italian government bonds and to a moderate widening of their spreads. While we do not expect this to translate into an acute sell-off in the near term, in this CIO Special we take a closer look at the underlying dynamics to assess the longer-term risks that may arise.

Here are some of our key takeaways from the recent activity: 

  • Lately, spreads on Italian 10-year bonds have risen above 200 bps, mainly due to the Italian government's higher deficit and lower growth forecasts, as the political tug-of-war over the EU fiscal rules to be reinstated in 2024 enters its final and decisive phase.
  • The Recovery and Resilience Facility (RRF) funds should provide a strong incentive for the Italian government to engage constructively with the EU.
  • Although not our base case at present, the ECB has more scope than in the past to put a cap on bond yields in the event of a significant widening of BTP spreads (via PEPP and TPI).



The CIO Special below is available to download. Please refer to the Important Information at the end of the memo for disclosures and risk warnings.



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