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Political turmoil in Italy

May 2018

Having breached 3% for the first time since 2011 in April, the ten-year US Treasury Bond yield rose above 3.10% in May. As the month progressed, however, Treasury bond yields subsided, dampened by mounting concerns over Italy’s political situation. Italian government bond yields surged during the month and the turmoil infected sentiment towards bonds issued by other peripheral European governments.

  • An auction of Italian government bonds generated strong demand
  • The FOMC is widely expected to tighten interest rates in June
  • Demand for fixed-income funds remained muted

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Having breached 3% for the first time since 2011 in April, the ten-year US Treasury Bond yield rose above 3.10% in May, driven up by the US economic outlook. US interest rates are widely expected to rise at the Federal Open Market Committee’s (FOMC’s) June meeting. According to minutes from policymakers’ May meeting, “most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation”. 

“Italian government bond yields surged during the month”

As May progressed, however, US Treasury bond yields subsided, dampened by mounting concerns over Italy’s political situation. The yield on the benchmark US Treasury Bond eased from 2.96% to 2.86% over the month. Italy had remained without a government since March’s General Election and attempts to form a coalition continued to flounder. Finally, at the very end of May, Guiseppe Conte was announced as the new Prime Minister. Italian government bond yields surged during the month: the yield on the benchmark Italian government bond soared from 1.65% to end May at 3.0%, while the two-year Italian government bond yield climbed from -0.19% to 1.93%. The turmoil infected sentiment towards bonds issued by other peripheral European governments, driving up yields in Spain and Portugal. 

An auction of Italian government debt generated considerable interest, but a sharp decline in bond prices meant the country’s government had to offer high yields. Five-year government bonds were sold with a yield of 2.32%, while ten-year bonds were sold with a yield of 3%. Both issues were oversubscribed.

Credit ratings agency Moody’s affirmed France’s “Aa2” credit rating and raised its outlook from “stable” to “positive”. Moody’s highlighted “ambitious and wide-ranging” reforms but also pointed out France’s high debt burden. The ten-year French government bond yield fell from 0.79% to 0.70% during May, while the benchmark German government bond yield dropped from 0.50% to 0.28%

Demand for fixed-income funds remained poor during April, according to the Investment Association (IA) , which reported net retail outflows of £210 million during the month. Nevertheless, Global Bond funds enjoyed an upturn in demand; the sector was the seventh-best-performing IA sector in April with inflows of £198 million. Investors’ appetite for funds in the Global Emerging Bond sector was also relatively strong, mirroring a sharp increase in demand for global emerging market equity funds.


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