Italy: FinMin Favourite & BTP Carry

The Next Italian FinMin

A few names have been put forward to be Italian FinMin in the press but one appears to be standing out: Paolo Savona.

Savona (82 years old) is calling for the re-introduction of the old lira and a 5 minute summary of his views on the euro is available here (in Italian

He is a world renowned economist and understands that the re-introduction of the lira would create inflation but that’s the price to pay to get back the “keys to your house”. He is a professor of economics with expertise in intl liquidity systems and derivatives. He was former minister of industry in Ciampi’s government.

This is the name put forward by the League and might be considered reckless by others. However, Salvini has been insistent on proposing the post at the Treasury. M5S appear mollified by getting Economics, Defence and Foreign Affairs Ministries according to reports.

His ultimate selection is seen by many in the market as negative for BTPs.

Italian carry

Just pointing out that the 3m roll and carry for BTPs is in the 14-16bp area all the way from 1Y-6Y. This could be wiped out in a couple of days given what is happening in Italy right now.

However, selling the front end of the BTP curve is expensive because the 14-16bp in Italy compares to 2-5bp in France in the same sector.

Instead, bearish Italian trades are much more likely to be done in trades like 2-5Y flatteners because these are neutral and the early price action today saw a vicious curve flattening in this area and emphasised what might happen if Italexit risks rise or the market flips to trading the price of bonds, rather than yields.

Italian roll and carry (3m)

Chart Source: Bloomberg