BONDS : Euro doubts hit Italian bonds

Italian bonds have fallen to the bottom of the class and the outlook remains fragile with concern that European monetary union won't happen in 1999.

"Every time someone opens their mouth about EMU, Italian bonds are prone to a setback," said Johannes Mueller, fund manager at DWS Deutsche Gesellschaft fur Wertpapiersparen in Frankfurt. The next milestone will come on 17 March when EU finance ministers review their convergence plans.

Italian treasury minister, Carlo Azeglio Ciampi, will be able to point to considerable economic achievements. Inflation has fallen to a 27-year low and there were signs on Friday that the coalition government is near to making cuts to pension and welfare spending.

These gains have been overshadowed by problems in Germany where record unemploy- ment threatens to derail the deficit and leave Europe's biggest economy struggling to meet targets for the single currency.

With officials of Germany's Bundesbank publicly discussing the possibility of delaying introduction of the single European currency, Italian bonds are the world's worst-performing market in dollar terms so far this year. The benchmark 10-year bond has slumped 11 per cent.

This dismal performance is a reversal from last year, when Italian bonds were the world's best. "It's not a surprise that high-yield markets are coming back to normal valuation levels," said Ravi Shankar, director of fixed-income strategy at Zurich Investment Management.

Mr Shankar said bond values were driven up at the end of last year by "euphoria that a single currency means equalisation of credit and risk" across European government bond markets. This quarter investors are coming round to the view that the yield premium offered on Italian debt wasn't high enough to compensate for the extra risk.

Last week, a Bundesbank council member, Klaus-Dieter Kuehbacher, said Germany won't be able to meet the 3 per cent budget deficit limit to join the single currency unless the government raises taxes or cuts social security spending.

"For the positive trend of the Italian bond market to continue, we need more transparency on the Italian political situation and the future of monetary union," said Fulvio Pellegrini at Cliam Italia SpA in Bergamo. "Unfortunately, Mr Prodi can't give us any reassurance that Italy will enter EMU," the fund manager said.

The lira and the Spanish peseta have both taken a beating. "Both currencies will remain fragile as the market is taking the view that convergence trades are over," said Alfredo Urrutia, an economist at Societe Generale Strauss Turnbull.

Italian and Spanish bond yields have "converged" closer to German levels amid expectations that yields will be level once European government bonds are denominated in the euro.

"Investors should still buy Italy," Stefano Massa, at Deutsche Bank Fondi in Milan, said. "If we get positive signals about Italy's entry into EMU, I see the spread with bonds narrowing back down to between 100 and 140 basis points." Copyright: IOS & Bloomberg

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Fans hold up a scarf at West Ham vs Liverpool
footballAfter Arsenal's clear victory, focus turns to West Ham vs Liverpool
New Articles
i100... she's just started school
ebooksAn unforgettable anthology of contemporary reportage
New Articles
Life and Style
Couples have been having sex less in 2014, according to a new survey
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
New Articles
i100... despite rising prices
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam