Coalition government not impressing investors
The newly formed coalition government in Italy has investors worried about their investments in Italian BTP 10 year notes. The League/5-Star coalition is proposing a tax cut on top of an increase in welfare spending. The good news is that the programme did not talk about exiting the euro.
The yield on the 10 year note has moved from last Friday's close of 1.872% to 2.21% currently (34 bp rise). That takes the price above the October 2017 high close at 2.18% and to the highest level since July 2017. The move higher has shot the yield above the 100 and 200 day MA . The 2.34% and 2.37% are the 2017 high yields.
The spread vs the 10 year German bund is also on the move. That spread bottomed at 113.6 basis points at the end of April. It is currently approaching the 50% retracement at 163.3 bps.
The government has been formed, but the market is not to comfortable. I would expect the risk will continue to be for higher yields as investors (other than the ECB QE buying) shun the debt as the dust settles.
Meanwhile the EURUSD remains near low levels (low for the day extended to 1.17488), and in the process took out the low for the week (from Wednesday) and the year at 1.17626. However, the price momentum is two-way and currently trades back above the old week's low again (at 1.1771).
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