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Needle Still Points South


Yields Bounce as Equities Make New Monthly Highs


Heading North


Bull Rally Accelerates


Economists Survey Raises 2021 CPI Forecast To 4.9%

ITALY: As a populist-led government takes power in Rome, the absolute yield on
Italian debt - not just the spread vs Bunds - will test fiscal sustainability.
- While spreads are obviously important, the 3 key risks are higher absolute
yields, a narrower primary budget surplus, and slower growth. 
- At the height of the May crisis, the 10Y BTP spread over Bunds rose by 204bps,
but BTP yields levels rose relatively less: 168bps. Though they hit 2014 levels
at 3.44%, BTPs came back (now 2.65%) - not unsustainable territory...yet.
- A senior Bank of Italy source told MNI in exclusive comments in May that
Italy`s long maturity profile means even if the rates on new bonds increased by
2pp (implying well above 3.0%), debt service costs could remain steady.
- Consistent with this, OECD sees the overall rate on Italian long-term debt at
2.2% in 2017, 2.4% in 2018 and 2.6% in 2019, with interest payments dropping, a
steady primary budget surplus, and debt as % of GDP falling from 132% to 128%.
- Current yields suggest sustainability for now, but Lega/M5S fiscal plans
would, unaltered, lead to a worsening primary balance and/or a debt crisis. And
spreads are unlikely to fall to earlier levels, reducing the margin for error.