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Chi Va Piano Va Sano (Slowly but Surely)

03 August 2018 by jbchevrel

This week, Italy CDS has been widening slowly (if compared to the May/Jun move) but surely, on fears of frictions between Tria, Salvini and Di Maio about the 2019 budget. The 10y BTP has broken above 3%, reaching 268bp vs Bund. Cash trading was thin and low liquidity has certainly been a factor exacerbating the moves. But the widening is not less meaningful, and it suggests that August 2018 will not be a classical August for carry trades in peripheral EGBs. Last night, SocGen rates strategists went out of their long BTPs, rotating into OATs. Not the same yield (just 33bp over Bund in 10s vs 252bp for BTPs), not the same risk either... Despite summer break beginning for Italian MPs next week, the timeline is going to be pretty tight with credit rating reviews starting in just two weeks, with Fitch on Aug 17. Moody's will follow on Sep 7, and S&P on Oct 26. The draft budget will then have to be delivered to the EC by Oct 15, which will assess it by Nov 30. On this bumpy road, the headline risk remains elevated for Italian assets. Beyond Italian borders, Italy's underperformance is behind SnrFin underperformance vs Main and Main underperformance vs CDX IG.