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Italian bonds rally ahead of Sunday’s referendum

A head of steam for Italian government bond yields.

There are no signs of jitters in the eurozone’s third largest debt market this morning in the last day of trading before the country votes in a closely-watched referendum this weekend.

Italy’s 10-year bond yields have fallen by as much as 10 basis points this morning (0.1 percentage points) to 1.95 per cent, outperforming a wider rally in eurozone sovereign debt. Yields fall when a bond’s price rises.

Rome’s benchmark borrowing costs have been climbing steadily ahead of a referendum on constitutional reform which could cost prime minister Matteo Renzi his job. Yields rose to as high as 2.3 per cent – their highest level since July 2015 – in recent weeks as polls indicate Mr Renzi’s ‘Yes’ side is poised for defeat.

The referendum’s final results are set to trickle in from the early hours of Monday morning (GMT), with an exit poll due at 2200 GMT when polls close.

Speaking on Friday, finance minister Pier Carlo Padoan warned of the prospect of “48 hours of market turbulence” after the result but said there was little risk of a “financial earthquake”.

The bond-sell off has also calmed in recent days following reports the European Central Bank could use the flexibility in its quantitative easing programme to temporarily ramp up its purchases of Italian government debt in a bid to quell any upsurge in borrowing costs next week.

Should a ‘No’ vote prevail, Italy could be poised for a general election next year. But the wider political outlook for the country following Mr Renzi’s resignation remains uncertain. Opposition to the reforms, which aim to centralise the government’s power over parliament, include right and left-wing populist movements and establishment figures such as former prime minister Mario Monti.

“The main anti-establishment forces, the far-right and [the Five Star Movement] have little in common – with the latter having repeatedly vowed to refuse any political alliance or coalition” says Anais Boussie at Credit Suisse.

The decision to hold a general election would rest with Italian president Sergio Mattarella, with analysts noting the head of state would be wary of provoking further market jitters by calling an immediate vote.

Ms Boussie notes:

A “No” winning with less than, say, 60 per cent would offer a window of opportunity for a Renzi government or similar, supported by the same majority in Parliament.

Indeed, more than 40 per cent support for the “Yes” would at least provide the PM with a relative majority in support of his policies, while the “No” victory would instead be scattered amongst a very heterogeneous political spectrum of far-right, far-left, center-right and M5S opposition

Amid the bond rally, investors are selling stocks today with all major European indices slipping today. Italy’s benchmark FTSE MIB is down 1 per cent, with French stocks down 1.5 per cent and Germany’s Dax losing 1.2 per cent.

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