By Geoffrey Smith
Investing.com -- Italian bonds rallied on Monday on hopes that Giorgia Meloni, tipped by many to be the country's next Prime Minister, would stick to the EU's fiscal rules if elected.
The yield on the benchmark Italian two-year note - a rough proxy for the risk of Italy being forced out of the Eurozone by its chronic debt problems - fell 15 basis points to 1.26%, its lowest in nearly two weeks. The yield on the 10-Year bond also fell, by 11 basis points, but remained above 3% at 3.04%. The Spread to its German counterpart narrowed to 224 basis points, having traded as wide as 250 basis points in recent weeks.
The risk premium on Italian debt has risen sharply in recent weeks as the coalition government led by Mario Draghi fell apart. Draghi resigned in July, after failing to win broad enough support for an action plan that proposed several controversial reforms to unlock nearly over €200 billion ($205 billion) of European Union funds for the country.
President Sergio Mattarella has called for new elections on September 25th, and Meloni's right-wing Brothers of Italy party - currently ahead in the polls - is seen as the likeliest candidate to form the new government.
Bloomberg had reported on Friday that Meloni would fall into line with the EU's conditions for receiving funds from the so-called Next Generation EU plan, which is intended to drive the European economy's recovery from the pandemic. It cited officials familiar with Meloni's thinking.
However, it wasn't clear how she intended to win over likely allies who have traditionally been more resistant to outside pressure from European institutions. Meloni, who has had the benefit of being the only major party to stay outside Draghi's government for the last 18 months and criticize it from the outside, hasn't confirmed the report herself.
According to an opinion poll commissioned by Sky Italia, Meloni's Fratelli d'Italia party would win 24.2% of the vote if elections were held tomorrow. While that's only a narrow lead of 0.8% over the center-left Democratic Party, the rest of the poll suggests that Meloni would find it easier to build a majority in parliament, given that two other right-wing parties - Matteo Salvini's Lega and Silvio Berlusconi's Forza Italia, are polling 13.5% and 8.0%, respectively.
Broad compliance with EU rules is also one of the conditions set by the European Central Bank for activating its new "Transmission Protection Instrument", aimed at limiting 'unwarranted' bond market volatility as it raises Eurozone interest rates for the first time in over a decade.