Italian financial assets have rallied after the country’s government said it was looking to change a deficit target that otherwise is in breach of EU spending rules.

Local stocks surged the most since June, while the yield on two-year debt securities fell to the lowest level in almost two months as an unidentified official said the administration was looking at changes to the targeted 2.4pc funding shortfall for 2019.

The detente suggests the Five Star-League coalition is keen to curb market volatility as it looks to make the next move in the budget standoff with the EU. The administration’s statement comes close on the heels of lukewarm investor reception to an auction of four-year inflation-linked bonds last week.

ECB chief economist Peter Praet said that Italy’s attempt to spend more in breach of European rules could be more than offset by tighter financial conditions, including rising borrowing costs,

“Today’s news should be treated with caution,” said Antoine Bouvet, a strategist at Mizuho International.

“The reports that the budget target would be lowered to 2pc to 2.1pc is emanating from League officials. It is far from sure Five-Star ministers would agree to such a cut, as it would likely compromise their flagship policy: the citizen’s income. So, in the short term, the optimism might be disappointed but the trend is still toward lower Italian yields.”

The yield on two-year bonds fell as much as 31 basis points to 0.63pc, the lowest level since September 19. The rate on 10-year securities dropped 17 basis points to 3.24pc, narrowing the yield premium over German bunds to 287 basis points as of 11.21 am in London. The euro rose 0.3pc to $1.1370 amid broad dollar weakness, while the FTSE-MIB Index of shares jumped as much as 3.2pc, the most since June 11. Shares of Intesa Sanpaolo and UniCredit rallied more than 5pc each. The cost to insure the country’s debt against default fell 15 basis points to 248 basis points, according to CMAQ data.

Italy’s offering last week of inflation-linked bonds targeted at the retail segment garnered the lowest amount of orders for a BTP Italia issue since they were introduced in 2012. Mr Praet said that the current financial conditions can’t last very long and the situation is probably already affecting investments.

Reuters

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