Bond markets hedge bets ahead of Italian, Austrian ballots

LONDON Dec 2 Investors appear to be having some
last-minute reservations about the gulf created between Italy
and its euro zone peers in debt markets before the country’s
weekend referendum that may once again go against consensus or
deliver unclear outcomes.

The same appears to be true of Austria, which on Sunday
holds a presidential election that could see Norbert Hofer of
the Freedom Party become the first far-right head of state
freely elected in western Europe since World War Two
.

Financial markets ended up on the wrong side of Britain’s
vote to leave the European Union in June and Donald Trump’s
victory in the U.S. presidential election last month.

They will be hoping the third time is lucky on Sunday,
having sided with bookmakers and pollsters that expect Italian
voters to reject a constitutional reform on which Prime Minister
Matteo Renzi has staked his career.

But even if Renzi loses, fresh elections are not a given.
President Sergio Mattarella could urge Renzi to stay, mandate
another centre-leftist to form a new government or even try to
persuade Silvio Berlusconi’s centre-right party to join or
support a caretaker or technocratic government.

The gap between Italian and German bond yields
— which shot to a 2 1/2-year high of 188 basis points (bps)
last week — fell to 167 bps on Friday. The gap between
Austria’s and Germany’s bonds dropped to 26 bps,
having been at a near 10-month high of 33 bps last week.

“I suspect on Monday it will be very difficult to have a
definitive opinion on what could be the future government in
Italy and the appetite for further reform,” said Franck Dixmier,
global head of fixed income at AllianzGI, adding that the fund
was ‘short’ Italian bonds and had no exposure to Austria.

“The ‘no’ is clearly embedded in the current spread, but on
top of the no what will be important is the outlook provided in
terms of the appetite for new general elections.”

Analysts said firm demand at an Italian debt sale on Tuesday
showed that some investors were scrambling to cover their short
positions in futures markets, which are on a scale not seen
since the 2011/2012 euro debt crisis. reut.rs/2fLW0lO

Shorting, or selling a borrowed asset, is a technique used
to bet that the value of an asset will decrease.

German 10-year bond yields — the euro zone benchmark —
continued their rise after a deal to curb oil production fed
expectations for higher inflation, and central bankers weighed
up whether to signal the end of monetary stimulus.

Yields rose 1 basis points to 0.34 percent,
edging towards a 10-month high of 0.40 percent.

Italian yields, meanwhile, edged down 5 bps to 1.99 percent
while Austrian equivalents were flat at 0.60 percent, according
to Tradeweb data.

There was some relief too in Italian stocks — the worst
performing index in the developed world this year — after
shares rose to a three-week high on Thursday.

For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Editing by Larry King)

Source: Reuters

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