Bonds on a roll as Italy hits EMU targets

Brave investors who placed their faith in the Italian government's commitment to qualifying for Europe's single currency have been rewarded with the best bond market returns in Europe this year - and there's more to come.

The bond rally that has delivered returns in lire of more than 28 per cent this year - ahead of the UK in second place with gains of nearly 19 per cent - has had just two cuts in official interest rates to help it along.

Last week consumer price reports confirmed that annual inflation was unchanged at 1.6 per cent in November, well below the 2 per cent ceiling demanded by the Bank of Italy. This suggests the party isn't over yet as it looks likely that the central bank will sanction more rate cuts in the coming months.

"Italian bonds are destined to rise further as Italy's entry to European Monetary Union is now certain," says Corso Pecori Giraldi, who helps manage L5,200bn (pounds 1.8bn) in bonds at Ducato Gestioni. "It's a European story, and Italian rates must come down to be a part of that story."

Italian bonds have been on a roll this year as government efforts to get its budget deficit down to the 3 per cent level demanded of countries to qualify for the single European currency from the launch date of 1 January 1999 have gained credibility.

Since November 1996, Italy has halved its budget deficit, trimming the shortfall between public spending and revenue to L10,500bn from L19,500bn.

That cut the deficit in the first 11 months of this year to L78,000bn, down from L138,000bn just a year earlier. Economists reckon that this puts Italy well on track to meet the EMU deficit target this year, and perhaps even to beat it by a whisker.

The reward for economic discipline? Italy's 10-year borrowing costs have dropped to a record low of 5.85 per cent, from about 7.5 per cent at the beginning of the year.

Moreover, the yield premium investors demand for buying Italian rather than German bonds - Europe's benchmark securities - has shrunk to a record low of 45 basis points from 200 basis points in March.

"The Italian/bund spread is destined to narrow in the coming year," says Mr Giraldi. "I see it at 30 basis points."

The approach of EMU has driven European bond yields closer together, as the bonds of countries using the same currency are expected to trade at similar levels.

Italy's performance in closing the gap to Germany, however, still lags behind that of its fellow southern European states, Portugal and Spain. Portuguese bonds yield about 36 basis points more than German issues, while Spanish yields offer a premium of about 29 basis points to Europe's bellwether market.

"Italy's been a great performance," says Sven Rump, manager at Vontobel Asset Management in Zurich. "I'm not convinced that Portugal should trade closer to Germany than Italy."

Mr Rump says he sees scope for the Italian yield premium to shed about another 10 basis points, although he feels that gains beyond that are likely to prove difficult.

Just as 10-year yield gaps are disappearing, so the differentials between official interest rates are expected to vanish. German and French central bankers are all insisting that the interest rate which will govern European monetary policy after 1999 will be closer to their 3.3 per cent level than it will to the 6.25 per cent prevailing in Italy.

Italy's discount rate has been cut twice this year, by three quarters of a point in January and by half a point in June. In September, the government unveiled a budget for next year that aims to slash some L25,000bn off the 1998 deficit and help Italy meet the single currency terms.

The bill consists of about L15,000bn in spending cuts and around L10,000bn of taxes.

The lower house of Italy's parliament is currently debating that bill, which must be approved by 31 December if it is to become law. The governor of the Bank of Italy, Antonio Fazio, has said he wants assurances that the budget will be passed before he will sanction lower rates.

With annual inflation one percentage point lower than it was at the beginning of the year, investors believe Mr Fazio might be willing to deliver a pre-Christmas rate cut as early as today.

That could be just the boost Italian bonds need to put on a final sprint into 1998.

"We could see a 50-basis-point rate cut after Thursday's inflation numbers, and another 50-basis-point cut after the budget approval," predicted Mr Giraldi at Ducato Gestioni.

q Additional reporting by Jason Jacobs.

Copyright: IOS & Bloomberg

Sport
Thiago Silva pulls Arjen Robben back to concede a penalty
world cup 2014Brazil 0 Netherlands 3: More misery for hosts as Dutch take third place
Sport
Robin van Persie hands his third-place medal to a supporter
Van Persie gives bronze medal to eccentric fan moments after being handed it by Blatter
News
Ian Thorpe had Rio 2016 in his sights
people
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

PROMOTED VIDEO
News
scienceScientists have developed a material so dark you can't see it...
News
Monkey business: Serkis is the king of the non-human character performance
peopleFirst Gollum, then King Kong - now the actor is swinging through trees in Dawn of the Planet of the Apes
Arts and Entertainment
Blackman: Landscape of children’s literature does not reflect the cultural diversity of young people
booksMalorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Voices
Mrs Brown's Boy: D'Movie has been a huge commercial success
voicesWhen it comes to national stereotyping, the Irish know it can pay to play up to outsiders' expectations, says DJ Taylor
Arts and Entertainment
Curtain calls: Madani Younis
theatreMadani Younis wants the neighbourhood to follow his work as closely as his audiences do
Life and Style
Douglas McMaster says the food industry is ‘traumatised’
food + drinkSilo in Brighton will have just six staple dishes on the menu every day, including one meat option, one fish, one vegan, and one 'wild card'
Life and Style
Once a month, waistline watcher Suran steps into a 3D body scanner that maps his body shape and records measurements with pinpoint accuracy
techFrom heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
News
Soft power: Matthew Barzun
peopleThe US Ambassador to London, Matthew Barzun, holds 'jeans and beer' gigs at his official residence. He says it's all part of the job
Sport
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
News
Gavin Maxwell in Sandaig with one of his pet otters
peopleWas the otter man the wildlife champion he appeared to be?
News
Rowsell says: 'Wearing wigs is a way of looking normal. I pick a style and colour and stick to it because I don't want to keep wearing different styles'
peopleThe World Champion cyclist Joanna Rowsell on breaking her collarbone, shattering her teeth - and dealing with alopecia
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

Otter man Gavin Maxwell's bitter legacy

The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

Joanna Rowsell: 'I wear my wig to look normal'

The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

Bill Granger's quick and delicious marinades

Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
Germany vs Argentina World Cup 2014 preview: Why Brazilians don't love their neighbours Argentina any more

Anyone but Argentina – why Brazilians don’t love their neighbours any more

The hosts will be supporting Germany in today's World Cup final, reports Alex Bellos
The Open 2014: Time again to ask that major question - can Lee Westwood win at last?

The Open 2014

Time again to ask that major question - can Lee Westwood win at last?