Cross Asset Investment Strategy: September 2018

Italian budget discussions are going to intensify as the 27th of September approaches, date of publication of the document outlining the new budget law and when there should be more clarity on the key economic projections and deficit targets. 

In these focus we make a few scenarios on budget deficit in order to understand the level of flexibility available and to link these different scenarios to recent trend in GDP growth and to what they could imply in terms of spread levels offered by Italian debt. Our findings show that current spread levels already imply an easier fiscal stance, including some of the flagship measures of the government plan. We also analysed the technical picture of Italian sovereign bonds in terms of perspective supply over the next months and investigated recent trends on the demand side. under this respect and together with structural trends in funding cost, average maturity and sensitivity to the rate risk we found some supportive notes. Relative value is investigated too, versus other sovereign bonds and periphery corporate bonds, showing limited impact so far from higher Italian spreads on other fixed income segments.

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