(Bloomberg) -- A clear result in Italy’s elections on Sunday may have diminished the risk of an unstable government, but it hasn’t made all investors comfortable just yet about going long on the country’s bonds.
“We will see continued volatility in Italian spreads and we remain short on Italian government bonds for that reason,” said David Zahn, head of European fixed income at Franklin Templeton. With an untested new administration led by a right-wing bloc, “there’s a real possibility they make some mis-statements over the next four to six weeks when they’re trying to pull their government together.”
The incoming government will have to tread carefully with the markets, Zahn said. Any mis-statements “could be interpreted quite negatively, especially if they start saying to the EU, ‘we know we said we’ll do these reforms, but now we’re not going to do them because our economy needs more spending.”
Giorgia Meloni, who heads the right-wing coalition that garnered about 44% of votes in the poll to replace the government headed by Mario Draghi, has sought to strike a moderate tone, calling for “responsibility” in governing and pledging not to overspend.
The 45-year-old Meloni leads the Brothers of Italy, which fronts the right-wing grouping which also includes Matteo Salvini’s League and ex-Premier Silvio Berlusconi’s Forza Italia parties.
Zahn called the right-wing bloc’s fiscal plans “aggressive,” saying that its pronouncements make for interesting comparisons with the UK and the market reaction to the program of Elizabeth Truss’s government.
Even minor moves by Italy which might “deviate from their current plans could have quite an impact on the market,” Zahn said.
Separately, ING Groep NV analysts Paolo Pizzoli, Antoine Bouvet and Francesco Pesole wrote in a note that “the scope of Meloni’s lead within her coalition will likely give her the upper hand in many decisions, but we suspect she will be very careful not to humiliate her allies for the sake of stability.”
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