Italian delegates are quickly finding out that saying the right things at the right time can have a positive effect on debt as Italian bonds are on a steady climb amidst the country’s financial unrest. Bond prices move conversely to yields, and the yields on benchmark Italian bonds dropped to a two-week low.
Italian leaders assured the European Union that the country would adhere to the union’s deficit rules, which quelled investor fears stemming from the Italian government’s spending plans. The assurances corroborated with comments made earlier this week by Deputy Prime Minister Matteo Salvini saying that “Clearly we will not do everything in one shot, not even Italians expect that from us … If we want to run the country for a long period we cannot blow up its public accounts.”
Since the beginning of May, yields on the benchmark 10-year Italian bonds have 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.
Source: tradingeconomics.com
Just 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 down.
“There’s follow-through from yesterday on relief that the government is saying it will adhere to EU budget rules,” said Marc Ostwald, global strategist at ADM Investor Services. “Doubtless the rally was given an extra little shove this morning from the story in Il Messaggero that the League proposal for a flat rate of tax is to be postponed.”
Trump Offered Assistance
In 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 in the face of the country’s distressed financial health, which could have ripple effect implications to the rest of the Eurozone.
“We have to see how the government does its fiscal numbers,” said Holger Schmieding, chief economist at investment firm Berenberg. “If they don’t add up by the end of September, things could indeed get somewhat rough for Italy. This grave uncertainty about the fiscal plans is a significant rollback for Italy because it does mean that down the road, an Italian debt crisis — which would look pretty unlikely a year ago — is now a possibility.”
There are no specifics as to how President Trump would implement this bond purchase. The Federal Reserve does have a market desk that typically handles the bank’s bond purchases, but it operates independently of the president.
High-Yield ETF Gains
As the yields on Italian benchmarks fell, a high-yield ETF, ProShares High Yield—Interest Rate Hdgd (BATS: HYHG), gained. HYHG gained slightly at 0.13% and is up 4.07% year-to-date, according to Yahoo! Finance performance numbers.
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade. By targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
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