Parallel currency proposal rocks Italian govt bonds

Germany’s Bund yield hovers near one-week low

LONDON, Aug 22, (RTRS): Italian government bond yields jumped on Tuesday, stretching the gap with German peers to a five-week high, in the wake of proposals to introduce a parallel currency in Italy that have upped the ante for elections due next year.

Italy’s 10-year bond yield, which moves inversely to the price, climbed 8 basis points to a three-week high at 2.11 percent, its biggest daily rise in a month.

As well as concern about the ECB’s monetary policy and geopolitics, analysts said the sell-off was caused by reports at the weekend that former prime minister Silvio Berlusconi, who leads the centre-right Forza Italia party, has indicated his support for the introduction of a parallel currency.

The report highlights concerns about broader anti-euro sentiment in Italy, the bloc’s third biggest economy, as it heads into elections due by May next year.

“People are referring to this story where Berlusconi outlines his idea of a parallel currency,” said Benjamin Schroeder, senior rates strategist at ING.

“This is not a new idea but what you see is that as people start positioning for Italian elections, stories like these get more and more attention.”

Earlier this year, comments by France’s far-right leader Marine Le Pen about leaving the euro rattled markets heading into French presidential elections in April and May.

While those jitters faded with the election of Emmanuel Macron as French president, political uncertainty in Italy could unsettle financial markets once more.

The idea of a parallel currency it Italy is also significant because it could be a way for Berlusconi to find some common ground with other political parties such as the anti-immigrant Northern League and right-wing Brothers of Italy, said Lorenzo Codogno, a visiting professor at the London School of Economics and chief economist at LC Macro Advisors.

“In fact, over the next few days the three parties are due to sit together and decide a common programme,” he said. “Politically, it would also be an important step towards preparing the centreright for the next general election.”

As Italian bonds underperformed their peers, the Italian/German 10-year yield gap reached 170 bps -- its widest in five weeks. That is up from a 2017 low of around 152 bps hit earlier this month.

Italian stocks also underperformed other European bourses.

Germany’s 10-year government bond yield was stuck near one-week lows on Tuesday ahead of a gathering of top central bankers later this week that could shed more on light on the direction for monetary policy.

Bund yields have fallen back from 18-month highs hit in July -- shortly after comments from European Central Bank chief Mario Draghi were seen paving the way for a scaling back of the ECB’s massive monetary stimulus in the months ahead.

While a trimming of expectations for tighter ECB policy have help push down bond yields across the euro zone slightly, analysts said there was a reluctance to go further without fresh policy cues.

Those could come later this week with both Draghi and U.S. Federal Reserve head Janet Yellen speaking at the annual central banking conference in Jackson Hole, Wyoming, which begins on Thursday.

Draghi will not deliver a new policy message at the meeting, two sources told Reuters last week. Yet with speculation mounting about when the ECB will signal an exit from its ultra-loose monetary policy, the speech remains a key focus for markets this week.

Draghi is also scheduled to speak on Wednesday, while ECB Board member Vitor Constancio speaks later on Tuesday.

“I wouldn’t exclude the ECB using the opportunity to shift the narrative,” said Benjamin Schroeder, senior rates strategist at ING.

Germany’s 10-year Bund yield was up just 1 basis point at 0.41 percent -within sight of a one-week low hit on Monday. It has roughly halved the more than 30 bps rise seen in the wake of Draghi’s speech in Portugal in late June.

Trade in money market futures also suggest investors have scaled back their expectations for a rate rise.

Markets price in around a 70 percent chance of a rate rise from the ECB by the end of 2018, having last month priced in a hike as early as June next year and a high chance of another move by the end of 2018.