###POV. ITALIAN THOUGHTS. EGB reaction to......>

BTPS: ###POV. ITALIAN THOUGHTS. EGB reaction to Italian election has been tame,

being; seen as idiosyncratic, rather than Europe-wide risk. At this stage, it

looks very probable that the next Italian PM will be from a populist party.

Hopes for Italian budget deficit are poor. If there is a Right-wing coalition it

will be brittle; a M5S/Lega coalition is still possible (but unlikely).

- Next stage is that President Matarella asks Lega's leader Salvini to attempt

to put together a coalition because the Right-Wing group attracted most votes.

- Cash BTP flows were thin today, although some small hedge fund selling was

seen early on. Most activity has been futures-led. Expect Italian banks will

likely step if BTPs weaken but if spreads to core tighten, foreigners may be

inclined to sell on strength. This leaves a steepening bias on the 5-10Y curve

given these investors' preferred habitats. Also, investors understand that if

Italian credit comes under severe strain, bonds trade upon price relative to

par, so 1) high coupons lose and 2) the yield curve flattens. Today, the high

coupon BTPs are weak and 10-30Y is flattening. Domestic instruments like

CCTeu/CTZ should outperform. 7Y CCTeu swap cheap to BTPs.