Italy’s Bond Rally Comes to an End
The Italian bond market has been on a tear for the past few years, with yields on 10-year bonds falling to a record low in 2020. But now, Morgan Stanley is predicting that the rally is over. The investment bank believes that the Italian economy is weakening, and that this will lead to higher yields on Italian bonds.
The Italian Economy
The Italian economy has been struggling for some time. The country has been in recession since 2018, and its unemployment rate is at a record high. The coronavirus pandemic has only made matters worse, with the economy shrinking by 8.9% in 2020. This has put a strain on the government’s finances, and the country’s debt-to-GDP ratio is now at a record high of 159%.
The Bond Rally
Despite the weak economy, the Italian bond market has been on a tear. Yields on 10-year bonds fell to a record low of 0.68% in 2020, and the spread between Italian and German bonds narrowed to its lowest level since the euro was introduced. This rally was driven by a combination of factors, including the European Central Bank’s bond-buying program and investor optimism about the Italian economy.
Morgan Stanley’s Prediction
However, Morgan Stanley now believes that the rally is over. The investment bank believes that the Italian economy is weakening, and that this will lead to higher yields on Italian bonds. In particular, Morgan Stanley is predicting that the spread between Italian and German bonds will widen to 1.5 percentage points by the end of the year.
Risks to the Bond Market
There are several risks to the Italian bond market. The most immediate risk is the coronavirus pandemic, which is still causing disruption to the economy. The government’s debt-to-GDP ratio is also a concern, as it is at a record high. Finally, there is the risk of political instability, as the government is currently in a fragile coalition.
The Outlook for Italian Bonds
Despite the risks, Morgan Stanley believes that the Italian bond market will remain stable in the near term. The investment bank is predicting that yields on 10-year bonds will remain below 1% for the rest of the year. However, the bank is also warning that the market could become more volatile in the future, as the Italian economy continues to struggle.
Conclusion
The Italian bond market has been on a tear for the past few years, but Morgan Stanley is now predicting that the rally is over. The investment bank believes that the Italian economy is weakening, and that this will lead to higher yields on Italian bonds. Despite the risks, Morgan Stanley believes that the Italian bond market will remain stable in the near term. However, the bank is also warning that the market could become more volatile in the future, as the Italian economy continues to struggle.