* Investors enthused by Renzi's ambitious reform agenda
* Renzi cabinet expected this weekend
By Emelia Sithole-Matarise
LONDON, Feb 19 Italian borrowing costs hit
eight-year lows on Wednesday as Prime Minister-designate Matteo
Renzi scrambled to form a cabinet that investors hope will
deliver on his ambitious reform agenda.
Investors have given the 39-year old leader of the
centre-left Democratic Party the benefit of the doubt after he
engineered the removal of party rival Enrico Letta from the
premiership last week. Renzi accused Letta of failure to push
through reforms needed to revive the economy.
Italy, whose economic recovery lags that of most other euro
zone states, needs more robust growth than the 0.1 percent eked
out in the fourth quarter if it is to curb a 2 trillion euro
debt equivalent to 1.3 times economic output.
Renzi, who is expected to have his new cabinet in place by
the weekend, has pledged reforms, including tackling the
electoral and constitutional system, within four months of
Italian 10-year yields fell to 3.54 percent,
their lowest since 2006, before retreating slightly to trade
steady on the day around 3.57 percent, almost level with Spanish
equivalents they have underperformed for most of 2014.
Italian yields have fallen almost 30 basis points since
Thursday when Renzi threw down the gauntlet to Letta. An upgrade
by ratings firm Moody's on Friday of the outlook on Italy's
creditworthiness helped spurred the fall in yields.
"Under the previous government it didn't look like there was
much chance of moving forward on reforms. Now it looks like
there's a chance, maybe a small one, but still a chance of
reforms," said Justin Knight, a strategist at UBS.
"We are bullish on the periphery and we expect the rally to
continue and Italy will go with it."
Italy's 10-year bond yield premium over German benchmarks
touched a fresh three-year low around 190 basis points, less
than half levels at the height of the euro zone crisis in early
2012. Knight expects a further 20 bps fall in the premium in the
The buoyancy in Italian bonds was not evident on the stock
market. Milan's FTSE MIB index was down 0.4 percent and
underperforming most other European bourses.
However, the index is still up some 2.7 percent from
Thursday's lows and close to levels last seen in mid-2011.
Doubts remain over whether Renzi will command the strong
support from the "grand coalition" that backed Letta which he
will need if he is to implement comprehensive structural
But for now, sentiment on Italian bonds remains upbeat, with
demand underpinned by expectations the European Central Bank
will keep monetary policy ultra-easy to fend off deflation.
"Expectations of Renzi delivering are building day by day.
It raises the question whether he can live up to the hopes and
if there's risk of profit-taking in the near term," said
Commerzbank strategist Michael Leister.
"It seems like sentiment and the downward momentum in
peripheral yields is very strong. I wouldn't recommend to catch
the falling knife. I see another five to 10 basis points (fall
in Italian yields) near-term."