Italian bonds took a tumble on Wednesday amid news that Italy’s president Sergio Mattarella would hold general elections on March 4, dissolving parliament. The election news raised a few eyebrows as the five-year legislative term was set to end in early 2018.
But the news reignited worries of recent European elections that have underlined the emergence of euroskeptics that threaten to disrupt the European Union trade bloc and the euro.
Some analysts have speculated that Italy remains the most likely to follow the U.K. out of the EU’s ranks, as populist parties have gained ground. According to a poll by the Pew Research Center, 34% of Italians said the nation should leave the EU.
As bond prices fell, the Italian 10-year bond yield TMBMKIT-10Y, +1.89% jumped around 12 basis points to 1.76% from a yearlong low of 1.64% on Monday. Bond prices move in the opposite direction of yields.
That lifted the premium paid for riskier Italian debt over comparable German government TMBMKDE-10Y, +4.85% from this year’s low of 1.34 percentage point to 1.46 percentage point, marking the widest spread in more than two weeks, according to FactSet. Typically Germany’s benchmark bond, considered a proxy for the EU economic health, boasts a sizable premium to its eurozone peers.
Recent polls suggests the coming race could be particularly contentious, as no party is expected to win a clear majority. The growing popularity by the antiestablishment 5 Star Movement founded by Beppe Grillo and victories in Sicilian elections by a right-wing coalition led by former prime minister’s Silvio Berlusconi suggest the tentative rule of the center-left Democratic Party may give way.
“Politically, pick a country, any European country, that wants to follow Britain out of the trough. Italy, in my opinion, is the most likely now with their mandated elections in March. Mr. Berlusconi and Mr. Grillo are demanding, once again, that Italy should be governed by the Roman Senate and not the Berliners of Brussels,” wrote Mark Grant, chief strategist for Hilltop Securities.
The geopolitical uncertainty over Italy’s elections have largely come in the wake of the country’s struggle to recover from the eurozone crisis.
With a banking system still weighed down by a legacy of bad loans, the Italian economy has lagged behind its European peers such as Germany and Spain. The last time the country notched a 2% annual growth rate was in 2006.
But it has made a recent upturn. Italy’s GDP grew 0.5% in the third quarter, contributing to a 1.8% annual growth rate.