Italian government bond prices were lower on Monday, as investors focused on signs of political sclerosis rather than economic data pointing to strength in manufacturing and a drop in the ranks of the unemployed.
The difference between Italian 10-year sovereign bonds and the benchmark German Bund — a key measure of investor confidence as it shows the premium traders are demanding to buy Italian debt — hit a more than three-year high on Monday of 2.03 per cent.
Higher Italian bond yields on Monday came after IHS Markit’s purchasing managers’ index, which measures everything from output to employment levels in the factory sector, accelerated from 55.4 to hit 56.2 in March, in numbers released Monday.
A number above 50 indicates expansion, and March was the strongest reading for the index since the eurozone debt crisis in 2011. The Italian unemployment rate also dropped to 11.5 per cent in February, from 11.8 per cent in January, in figures released on Monday.
Bond spreads for other peripheral countries in the eurozone are down from their year highs, while many investors have started to avoid Italian debt, or place negative bets that yields will rise further in absolute terms, or that the spread between German and Italian borrowing costs will increase.
Eric Stein, co-director of Global Income for the Boston asset manager Eaton Vance, said his fund was betting against Italian debt in part as a reflection of broader concerns about the euro prompted by the rise of populist parties. “If France goes poorly, Italian bond spreads are going to widen as well”, he said.
Italy, the third-largest economy in the euro, has its largest absolute stock of debt, equivalent to 1.3 times annual economic output.
“The economy hasn’t really grown, basically since it joined the eurozone,” said Mr Stein. “The eurozone debt crisis was always about debt and competitiveness, and Italy has both those issues,” he said.
The difference in German and Italian borrowing costs was last so wide in February 2014, before bond markets began to anticipate central bank asset purchases announced at the start of 2015, which helped to suppress borrowing costs across the continent.
Debt traders have started to look beyond the French presidential election, where concerns that the far right may do well in the first round of voting due to take place this month had caused a spike in French borrowing costs earlier this year.
Italian elections are likely to be held in the next 12 months, replacing a caretaker government in charge since Matteo Renzi resigned as prime minister in December after he lost a referendum to change the Italian constitution, part of a broader reform agenda.
“The main thing with Italy now is politics, more than the state of the economy,” said Fabio Fois, economist for Barclays.
“We expect financial markets to soon start questioning whether Italy will be able to deliver a stable pro-European government after the next general elections. The polls continue to indicate at best a hung parliament, and anti-establishment parties, particularly the Five Star Movement, continue to do very well,” he said.