Benchmark Italian bond yields fell on Tuesday as the ruling coalition appears to be nearing a compromise regarding the country’s 2019 budget, vowing to keep the deficit under 2% of its gross domestic product. The 10-year yield fell to 2.89 after reaching a two-week high of 2.96 just yesterday.
Since the beginning of May, yields on the benchmark 10-year Italian bond has spiked past 3%. Italian bonds have faced mounting pressure the last few months since the anti-establishment coalition of the right-wing League and the 5-Star Movement took over office in June.
“It looks like a compromise is taking shape,” said Martin van Vliet, senior rates strategist at ING. “Everyone assumes it (the deficit forecast) will be around 2 percent.”
Source: tradingeconomics.com
Analysts have reported that the Italian government will unveil a deficit plan for 2019 that will include a 36 billion euros investment package.
During a meeting with Italian prime minister Giuseppe Conte last month, US President Donald Trump purportedly offered Italy assistance in buying the country’s sovereign bonds next year in the face of the country’s distressed financial health, which could have ripple effect implications to the rest of the Eurozone.
Last year, Italy recorded a government debt equal to more than 130% of the country’s gross domestic product, but has struggled to keep its repayments under control. There are no specifics as to how President Trump would implement this bond purchase if the Italian government agreed.
U.S. Benchmark Yields Rise
Meanwhile, in the U.S., the opposite is taking place as the capital markets are bracing themselves ahead of a Federal Reserve interest rate decision set to take place on Wednesday as it is widely expected that the central bank will continue their tightening with another rate hike to temper economic growth. In the meantime, benchmark Treasury yields ticked higher–the 10-year rose to 3.104 and the 30-year yield ticked up to 3.237.
The Fed began its two-day monetary policy meeting today, which will probably include a bevy of data presented that shows the economy is moving forward strength to strength, including an extended bull stock market run that has already seen major indexes like the S&P 500 reach record levels with companies like Apple and Amazon reaching the $1 trillion market capitalization level.
Since the installment of President Trump’s administration, the country’s gross domestic product has grown by an average of 2.7% per quarter. Furthermore, the final estimate for second-quarter GDP is expected to show a revision of 4.3% growth, while the third quarter growth is forecasted to come in around 3.3%.
“Fed funds increases in September and December are as certain as certain can be,” John Donaldson, director of fixed income at Haverford Trust, wrote in his response to the survey. “Their real challenge starts after the first increase in 2019, which will bring the rate to 2.75 percent, or finally back to even to inflation.”
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