Julius Baer: Bonos gubernamentales Italia | Oro

Redacción - Miercoles, 30 de Mayo

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Italian government bonds: A timely correction keeps the crisis away Italy saw the yield of its benchmark 10- year government bond explode to 3.5% intra-day to close at 3.16%, up from 2.67% on Monday and 1.75% at the beginning of the month. The market took the latest political developments as an excuse for an overdue correction. Italy’s debt had been trading at yield levels consistent with an ‘A’ rating, while the fiscal policy outlook is more like a ‘Ba’ rating. Readers will recall that the two parties that failed to form a coalition have promised tax cuts, more infrastructure spending and a minimum income for everybody. Such populist promises are not helpful in reducing the sky-high debt level of the government. As such, the latest correction on the bond market may serve as a welcome reminder to the parties involved that Italy needs a credible reform strategy, not a fiscal adventure. The correction also sends a strong signal to Frankfurt and Brussels that there is still room for improvement in the ‘banking union’. The correction on the market for subordinated bank debt, which we have reduced to Neutral earlier this year, shows that the buffers are still insufficient to fend off bank runs. Finally, the ‘political crisis’ demonstrates how difficult it is to invest in the German government bond market. In the last five days, the yield of the benchmark 10-year government bond fell from 0.55% to an intra-day low of 0.19% before spiking back up to 0.35%, closing at 0.26%. These moves serve as a strong reminder of the liquidity issue. As European Central Bank board member Benoit Coeuré already outlined in February, less than 10% of the German government bonds are not held by central banks. Still, the bond market uses bund futures to manage positions. We can only imagine the short-covering pressure that the Italian move has caused this week.

We do not expect Italy to leave the euro. Italy has a high savings rate, a high ratio of homeowners and thus simply too much to lose. It is hard to say at what level Italian government bonds will become attractive again, but we expect the political drama to become background noise and stay with us for some months. Therefore, we do not expect a repeat of the European debt crisis of 2011/2012, since eurozone members have reduced their imbalances, have created support mechanisms, and the European Central Bank has shown its ability “to do whatever it takes”. Therefore, we expect the situation to calm down and subordinated bank bonds to recover over time.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

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Gold: A rather muted reaction to Italy’s turmoil

 

Amid all the turmoil Italy’s political crisis caused in financial markets yesterday, with bond yields spiking and equities plummeting, gold showed a rather muted reaction. It temporarily jumped above USD 1,300 per ounce during the day but closed below that level as it faced headwinds from a rising US dollar. While gold in euros was up 0.8% and reached the highest level in a year, this was entirely due to the depreciation of the euro versus the dollar. In other words, US dollar cash would have yielded the same return. While politics will continue to make headlines over the coming weeks, if not months, this is unlikely to provide a major boost to gold in our view. The European banking system is much more resilient today than during the debt crisis, reducing systemic risks in the financial market and limiting the likelihood of another multi-year bull market for gold. That said, the related uncertainty should provide support to prices. Beyond Italian politics, we still see the US rate cycle and US dollar in the driving seat for gold. This should keep a lid on gold for the time being and supports our short-term neutral view. Against the backdrop of our medium to longer-term positive view, we believe structures that allow accumulating gold on lower than prevailing prices, i.e. to average into the market, are a good option to build positions gradually. Today’s rate cycle headwinds should fade as the year progresses, opening up medium- to longer-term buying opportunities. Sustainable upside should materialise once growth concerns and inflation concerns creep into financial markets, reviving the demand for gold as a safe haven.

 

Amid all the turmoil Italy’s political crisis created in financial markets yesterday, gold showed a rather muted reaction. While the related uncertainty provides support to prices, we still see the US rate cycle and US dollar in the driving seat, which should keep a lid on gold for the time being. We remain neutral.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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