Italian government bonds have hardly responded to the government crisis. A look at who owns those bonds nowadays provides some clues as to why this might be.
Government crises are not unusual in Italy. Historians have counted no less than 65 governments since 1946. However, a closer look at the development of spreads in 2018 shows that political uncertainties can leave strong marks in financial markets. That makes developments in recent weeks all the more remarkable. Since early August, the populist government has been on the verge of collapse. On August 20, prime minster Giuseppe Conte finally resigned. It remains unclear what will happen next, but a new government backed by the Five-Star Movement and the centre-left Partito Democratico is looking increasingly probable.
Yet, all these political twists and turns have barely made a dent on Italian government bonds. After a brief spike, 10-year Italian sovereigns are trading at a spread of 200 basis points over German Bunds, the same level as at the beginning of the month. In the first half of the year, the risk premium was 260 basis points on average.
This stability largely is due to the prospect of new bond purchases by central banks. Since June, there have been numerous signs that the European Central Bank (ECB) might soon resume its purchasing program. This would further increase the proportion of government bonds held by Italy’s central bank. As our "Chart of the Week" shows, there has already been a substantial shift during the last 10 years: while foreign investors held almost 50% of Italian government bonds at the end of 2009, this share has now come down to just over 30%. The share held directly by Italian private investors fell, too, from just under 20% to only 5% now. On the other hand, domestic banks and especially the central bank have increased their holdings. The share of the latter rose from 4% to currently almost 20%, which is the equivalent to an increase of 337 billion euros. In addition, it is reassuring that Italy, thanks to the austerity of recent years, nowadays is running a substantial current-account surplus.
"Given the mass of negative-yielding alternatives, Italian government bonds with their still positive yield seem tempting", says Joern Wasmund, Head of Fixed Income at DWS. And indeed, since the beginning of the year, foreign investors have increased their holdings by more than 15 billion euros, according to the latest available data.
Sources: Banca d’ Italia, Bloomberg Finance L.P., DWS Investment GmbH as of 8/20/19