Italian bonds bounce on reports Rome may trim deficit targets

The Italian government may yield to criticism of its recent budget proposals, but only modestly, following a late night meeting between the Prime Minister, Giusseppe Conte, and the country's two deputy PMs, Five Star leader Luigi di Maio and the League's Matteo Salvini.

On the back of that news, the yield on the country's benchmark 10-year government note was falling by 13 basis points to 3.32%.

Nevertheless, and as analysts at UniCredit Research pointed out: "any indication from the government that may deny such indications and lead to a step up in confrontation will negatively affect BTP spreads.

"The situation remains fluid and mood can make sudden U-turns, depending on a rather unpredictable news flow."

Holger Schmieding at Berenberg, on the other hand, was scathing in his criticism, telling clients: "With their borderline fiscal plans, Italy’s radical leaders have put themselves at the mercy of bond vigilantes, rating agencies and their European peers.

"Italy's budget plans are seriously misguided but probably not scary enough to trigger a genuine debt crisis now. Noisy muddling through remains our base case. Still, careless talk by top leaders in Rome keeps a tail risk alive that Italy could cross the border and fall into a serious crisis soon."

Overnight, Italian daily, Corriere della Sera, reported that officials in Rome will offer to reduce the country's budget deficit as a proportion of gross domestic product in 2020 and 2021, to 2.2% and 2.0%, respectively, but hold the line on next year's expected shortfall of 2.4%.

Under the prior government, the deficit had originally been expected to narrow to 0.8% of GDP in 2019, but electoral promises by Italy's Five Star Movement and League political parties, which were ruling together via a coalition, had led them to revised that target sharply higher, to 2.4% for 2019, 2020 and 2021.

Rome was expected to publish an Update to the Economic and Financial Document 2018 on Wednesday which would later be presented to parliament, with another cabinet meeting later in the day also considered likely by some analysts.

Both chambers of parliament were expected to start discussing the document at the beginning of the following week.