Irish bonds for the first time are benefiting from a political storm rocking Italian debt markets, as government borrowing costs here fall back.
The costs of borrowing for the indebted Italian state climbed further amid a political crisis that has raised investor fears over the eurozone’s third largest economy remaining in the single currency.
The yield on the Italy’s 10-year bond rose to 3% as investors pulled money out of Italy and into the core German and French government debt markets.
The 10-year German yield has now fallen to 0.32% from 0.6% in the last two weeks, while the French yield has fallen to 0.68% from 0.85% over the same period.
Other so-called peripheral bond markets, Spain and Portugal, saw the market yields for their bonds rising sharply. The Irish 10-year bond yield unexpectedly traded below 1% yesterday, down from 1.02% from two weeks ago.
“If anything, there has been a marginal benefit” for Irish bonds from the Italian crisis, said Ryan McGrath, a senior analyst at Cantor Fitzgerald.
After the Italian president this week vetoed the euro-sceptic choice for finance minister of the coalition between the Five Star Movement and the League, Mr McGrath said there was a lot of uncertainty surrounding the way the crisis could evolve.
However, the euro which fell only slightly against the dollar is showing little evidence that investors are expecting the crisis to escalate to a stage where Italy’s future membership of the eurozone would come into play, he said. The euro fell 0.6% to $1.155.
Capital Economics in London said “so far the situation appears contained”.
“The spreads of other peripheral government bond yields over German bunds have risen, but not remarkably so. This suggests that investors are for now fairly confident that the eurozone as a whole will be able to withstand the current political uncertainty in Italy,” it said.
It warned, however: “If a referendum on euro membership was called, it would pose a systemic and existential risk to the whole project. In this situation, contagion would become a key issue and we think that the ECB would have to engage (in buying bonds).”
Meanwhile, investor George Soros warned that another major financial crisis could be on the cards.
The termination of the nuclear deal with Iran and the destruction of the transatlantic alliance between the EU and the US are “bound to have a negative effect on the European economy and cause other dislocations,” including a devaluing of emerging-market currencies, Mr Soros said in a speech in Paris.
“We may be heading for another major financial crisis,” he said.
"An existential crisis is no longer a figure of speech but the harsh reality. Europe needs to do something drastic to escape it. It needs to reinvent itself," George Soros says in Paris https://t.co/ftKXfJJoW8 #tictocnews pic.twitter.com/JpM5a30Lrw— Bloomberg Quicktake (@Quicktake) May 29, 2018
For the EU, “everything that could go wrong has gone wrong,” he said, citing the refugee crisis and Brexit.
His proposed remedy for some of the ills facing Europe is an EU-funded Marshall Plan for Africa, worth about €30bn a year, which would ease migratory pressures to the continent.
He also proposed a radical transformation of the EU, including the abandonment of the clause forcing its member states to join the single currency.
“The euro has many unresolved problems and they must not be allowed to destroy the European Union,” he said.