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No, They Can't

27 January 2017 by lberuti

The overriding theme of the last few days of the week was undoubtedly government bonds, and more specifically French and Italian. France was penalised by the “PenelopeGate” where the wife of Mr Fillon, the right wing candidate, is suspected of having received public money improperly and by some large sovereign, agency and supranational sector issuance. That pushed the yield of 10Y OATs above 1%. On Wednesday, Italy’s struck down part of the country’s existing election law. While it made the prospect for the anti-establishment Five Star Movement gaining power less likely, the ruling does not eliminate the risk of a potential political deadlock, which some analysts effectively see as a best-case scenario but also means no reforms will be able to be passed. That would leave the Italian economy open to negative shocks and further structural deterioration. It gave a reason to investors to send 10Y BTP’s yield above 2.2%, the highest since early December. It set the scene for a weaker credit market in Europe led by Financials, but the US market is not ready to go wider yet, and credit indices were unable to exit the narrow range they have traded in since the beginning of the year.