Italian bonds slump, euro flirts with parity ahead of ECB introduction of anti-fragmentation tool

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Italian government bonds tumbled on Thursday as Prime Minister Mario Draghi faces being removed from office, just a week ahead of a new tool from the European Central Bank intended to quell such turmoil in Italy’s debt markets. the euro zone.

The yield of the Italian 10-year bond TMBMKIT-10Y,
3.366%
jumped 26 basis points to 3.40%, or 217 basis points above the 10-year German Bund TMBMKDE-10Y,
1.216%.

EURUSD euro,
-0.83%
once again flirted with parity, trading at $1.0006.

Draghi’s coalition was in jeopardy after the populist 5-Star Movement said it would boycott a vote on energy aid. Their objection is to a provision that would allow Rome to operate a garbage incinerator, and they are also upset with Draghi’s stance on Russia.

Read also : The fate of the Italian government hangs in the balance

Potentially, Draghi could be forced to resign, or could choose to do so, given his declared desire to keep the populist party in his coalition.

The ECB should present next week its tool intended to limit the spread between the bond yields of the various countries of the euro zone.

“The tool was probably never designed to counter spread widening due to idiosyncratic country risk (on the contrary, it prevents contagion and therefore reduces the leverage of the ‘offending’ country). However, the timing of this crisis could tip the risks around the tool – the fragmentation of which we do not expect to address in any way, but rather the dislocation – towards tighter limits, stricter conditionality and higher pain thresholds. high,” Citi analysts said.

If Draghi resigns, a new election could take place in late September or early October.

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