Italian bonds volatility to persist during the budgetary process

The I talia n bond market is again under pressure as tensions rise within the ruling coalition and prospects of a more expansionary fiscal policy grow . Government bonds sold off sharply during two days last week after the announcement of a n informal budget meeting held on Friday between the key ministers . While we view the meeting essentially as a non-event, the market response nonetheless shows degree of concern regarding the political uncertainty in Italy. The strong disagreement within the ruling coalition about the overall fiscal stance of the government continues to fuel investors’ concerns, especially as Fitch and Moody’s rating reviews are around the corner. As long as the “market-friendly” Finance Mini ster Giovanni Tria remains in charge, we believe the 2019 fiscal plan – albeit costly – should avoid major budgetary slippages. However, we still see a substantial risk of early elections in H1 2019 due to high tensions within the government and the strong performance of the Lega in recent polls.