A furious global hunt for yield has helped to spark a significant repricing of fixed-income markets.
The consequences of last week’s major market moves were by turns high-profile and obscure.
One oxymoron-inclined senior White House adviser to President Donald Trump insisted that the inverted curve that appeared briefly in US Treasury yields was in fact “flat”, while the Austrian 100-year bond continued to trade at more than twice its face value.
But only the most charitable investor would argue there were many fundamental factors behind the downward march of potential borrowing costs for Italy’s troubled government.
Last March, a national election yielded no outright political winner in Rome, but sizeable and unprecedented vote shares for anti-immigrant and anti-establishment parties immediately prompted hand-wringing among investors in the world’s eighth largest economy.
Those two political groupings, known as Lega and the Five Star Movement (M5S), eventually struck a deal to form an unlikely coalition government.
But their combined campaign promises of higher spending and lower taxes frightened both the market and the European Commission, which has closely monitored the Italian economy and its expensively-serviced debt pile since the Eurozone crisis.
This fear has continued to mean that “I Buoni del Tesoro Poliennali” – the Italian name for multi-year government bonds, typically shortened to BTPs – have frequently ended up as the whipping boys of Europe’s sovereign credit markets.
And as the coalition crumbles this week, potentially transitioning from confrontational inaction to outright collapse with a no-confidence vote in parliament widely mooted, Italian politics enters its latest crisis chapter thanks to these unnatural bedfellows.
Originally a separatist movement that sought to build a new nationalist and pro-business economy from the rump of Italy’s northern industrial heartland, Lega only recently switched from criticising southern Italians to targeting immigrants.
Meanwhile, M5S won many of its early adherents during the financial crisis and for years has railed against government austerity and low unemployment, winning much of its support in the impoverished south.
What both shared was a skepticism of the European Union and its institutions, which had worked in concert with previous technocrat-led governments in Rome to try to reform Italy’s creaking fiscal architecture and retool inefficient aspects of the frequently stagnating economy.
Several of the ambitious objectives the two coalition partners agreed to in their government contract had placed them on collision course with Brussels, where the European Commission was focused on reducing Rome’s overall debt pile and tamping down its annual deficit.
But the failure to implement many of those targets, and the fact that the country’s economy did not respond positively to the admittedly circumscribed stimulus efforts, has helped to heighten intra-government rancour.
And after poll numbers continued to shift in favour of Lega and its leader Matteo Salvini, he announced earlier this month that the coalition was no longer functional. In response, M5S’s leadership said he was untrustworthy.
And now investors must once more wait to see if a fragmented parliament and the Italian President Sergio Mattarella can find an exit strategy that will, at the very least, provide some certainty about the country’s immediate future.