Hendrik Tuch, head of fixed income for the Netherlands at Aegon Asset Management, remarked that investors may want to rethink their approaches to Italian bonds due to the corona crisis. He cites Italy’s new Prime Minister, Mario Draghi, and the EU’s coronavirus rescue plans as reasons supporting the new approach. However, due to the EU’s rescue plans, the “sweet spot” for Italian bonds won’t be long-term.
On the new Prime Minister, Tuch stated: “As an economist with an impressive resume, Draghi has already gained the confidence of investors. For example, ‘The Draghi effect’ is helping demand for Italian bonds—even allowing the country to cut yields while still selling the full amount of debt it wanted in the most recent new debt offerings after Draghi took office.”
With regards to the effect of the EU’s coronavirus assistance, Tuch had this to say: “When the ECB introduced the Pandemic Emergency Purchase Programme (PEPP) this time last year in response to the global pandemic, it was an unprecedented stimulus with no limits on policy. Initially, the bond-buying program heavily weighted its purchases toward Italy. Since August, that has tapered off with signs of the crisis phase coming to an end with the introduction of several successful vaccines. But thus far, Italian government bonds have been able to sustain their appeal.”
“Market sentiment can [also] change on a dime for these bonds, so we are cautiously optimistic. Right now, Italian bonds are in a sweet spot, but their longer-term outlook is still very uncertain. Changes in the political, economic, or health situations will be important factors in altering the outlook and can send momentum in a different direction,” he said.