Rate hikes push bonds to 2014 highs with Italian election just around the corner

German 10-year bondconsidered the safest in Europe, exceeded 1.9% on Wednesday, which is its highest level since 2014. The situation is similar in the case of Spanish debt at the same term, that in the same session reached 3.06% and also touched maximums of the last eight years.

The interest demanded by investors to acquire Portugal 10-year bonds stroked 3%, again the highest percentage in the last eight years. The paper Greek exceeded 4.5%, in his case maximums of 2018.

The Italian 10-year bond, For its part, it exceeded 4.2%, levels not seen since last June and which led the European Central Bank (ECB) to call an emergency meeting. After the meeting, the European institution announced the creation of a special tool to avoid financial fragmentation.

The baptized as Transmission Protection Instrument (or TPI, the acronym of English Transmission Protection Instrument) will be used by the European institution to control risk premiums if necessary.

[El BCE crea una red de seguridad para países endeudados como España que permite subir tipos más rápido]

The increase in the profitability of the debt of European governments is not an isolated event. It has been happening since the exercise began, in a context of tightening of the monetary policy of the central banks.

At the ECB, it has already increased its reference rates by 125 basis points in just two meetings. The first increase -of half a percentage point- took place in June. It was double what was previously communicated to the market by the institution itself.

From the ECB to the Fed

On September 8, the issuing institute took another step in controlling prices and raised the price of money 75 basis points. Until now, that It was the biggest rise in its history.

It is expected that this Thursday the Bank of England increase your rates again. He could do it at 75 basis points, having done it at 50 basis points in his previous quote. The institutions of Sweden, Switzerland or Canada they have also accelerated rate hikes with the aim of reducing inflation.

The United States Federal Reserve (Fed) has raised its reference rates by 300 basis points in five meetings the last three -including this Wednesday- at the stroke of three quarters of a point.

10-year US bond yield It has exceeded 3.6% in recent days, the highest rate since 2011. Above 4%, the two-year debt of the United States is at the highest of 2007.

italian elections

The escalation of the interest demanded on the debt of the eurozone countries takes place with the Italian elections just around the corner. Polls predict that the right-wing coalition -formed by Giorgia Meloni’s Brothers of Italy, Matteo Salvini’s La Liga and Silvio Berlusconi’s Forza Italia- win the victory at the polls on September 25.

“Right now, it is difficult to predict what risks such a coalition will bring to the country”, they point out in the manager Vontobel. Regardless of its composition, the new Transalpine Government will have to face several challenges.

Beyond address an energy crisis that is devastating the whole of Europe, Less than a month after the elections, on October 15, Italy and the other countries in the euro area must have sent drafts of their budget plans to the European Commission (EC). Later, Brussels will make the pertinent recommendations.

Before that, Italy has to adjust your macroeconomic picture compared to the calculations made in April. At that time, the Government of Mario Draghi estimated that the Italian economy would grow by 2.4% in 2023. The deficit and the debt would reach 3.9% and 140% of the gross domestic product (GDP), respectively.

Uncertainty

Another challenge for the new Italian Executive will be the application of the Recovery Plan committed to Brussels to receive the following disbursements of European funds.

Both the budget adjustment and the application of the Recovery Plan are two of the issues that cause the most concern to the experts.

Despite this, in Scope Rating they consider that “the limitations that any Italian Government faces once in power will significantly reduce its room for maneuver and, therefore, will ultimately determine a narrow set of economic policy options”.

“That the Italian 10-year bond yield is already around 4% implies very limited fiscal space, if any, for the next Italian government, given the country’s weak medium-term growth prospects” , they add.

ICC candidate

Although the Italian elections do not pose a short-term threat to the euro -What it did happen in 2018- and ECB purchases of Italian debt remain favourable, analysts at Edmond de Rothschild AM believe that “volatility should return at the time of negotiations with Europe, which should start in November.

“It is clear that political instability adds to an already complicated situation, which makes Italy the first candidate to use the TPI”, they affirm in Schroders. However, deviating from budget rules could prevent the use of the ECB’s new anti-fragmentation tool.

The Italian risk premium – the differential between the yield on the transalpine bond and the German 10-year bond – is currently around 223 basis points. According to Edmond de Rothschild’s forecasts, the extra cost that Italiana has to pay to finance itself “could rise well above 250 basis points”.

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