Italian government bond ETFs have seen their first inflows since the beginning of the year over recent days as the country’s general election draws nearer.
Since the 14 February investors have poured some €181m into Italian government bond ETFs, according to TrackInsight, marking the first inflows in 2018 and taking the total sales for the year so far to €133m, after the asset category suffered some outflows throughout January and the beginning of February.
Investors are snapping up ETFs with exposure to Italy’s government debt on expectations of further falls in spreads amid pre-election jitters, with Italian 10-year bonds seeing their yields drop below the 2% mark in the middle of month, before rising back up to 2.069% by Tuesday 20 February. Yields dropped once again to 2.017% by the following Monday.
However, Tradeweb data predicts soaring yields as the election day draws nearer, with yields on 10-year government debt set for their biggest weekly rise since December.
The upcoming election
The demand for Italian bonds suggests investors are unperturbed by the political tensions gripping the country as Italians prepare to go to the polls on Sunday 4 March. The election promises to be a three-way battle between the centre right led by Silvio Berlusconi, the centre left led by Pier Luigi Bersani and the anti-establishment Five Star Movement headed up by Beppe Grillo.
Italy’s latest election has the potential to be one of the most de-stabilising votes the country has seen in years, with the results still too close to call and the latest polls pointing to a possibility of a hung parliament, where no one party or coalition has the majority to form a government.
If this is the outcome, current Italian president Sergio Mattarella will call on all the parties to form a broader coalition of mainstream parties, which could include the ruling centre-left Democratic Party as well as Berlusconi’s Forza Italia, according to Reuters.
Analysts believe this could be the best outcome for markets, because a broader coalition could mean more political stability in Europe, but the uncertainty surrounding this situation could still cause short-term volatility in assets.
Perhaps this is the reason why investors have continued to take money out of Italian stock ETFs, with total outflows of €210m since the beginning of the year to Friday 23 February, despite returns from these vehicles being much higher than those derived from bonds; Italian bond ETFs are up just 0.16% year-to-date, while the stock equivalent has risen 2.46% over the same period. Over the year to 26 February, the FTSE MIB index is up 3.9%.
With uncertainty surrounding European markets and politics alike, the rest of the week will be one to watch for investors in Europe and Italy as the outcome of the poll draws ever nearer.