Political risks back in euro and Italian bonds - Danske

According to analysts from Danske Bank, the Eurosceptic win in the Italian elections last Sunday leaves political risk premium in EUR and Italian bonds under pressure.

Key Quotes: 

“While the SPD voted to join the CDU in forming a coalition government, securing Angela Merkel another term as German chancellor, the hung parliament outcome in Italy following last weekend’s election with anti-establishment parties such as the Five-Star Movement and Northern League, seeing strong backing from voters, keeps political risks on the agenda in the eurozone for the time being. However, it is not likely to be until 23 March, when both houses of parliament come together for the first time, that we will get a clearer indication on where Italy is heading.”

“In our view, it is unlikely we will have a new Italian government in place before May or June this year and a new election remain a possibility. The uncertainty and notably risk (if small) of a eurosceptic government being formed should keep a political risk premium in EUR crosses and keep Italian bond yields under pressure near term.”