(Bloomberg) -- Italy’s record-breaking bond rally still has room to run with Mario Draghi set to significantly reduce uncertainty over policy, according to Barclays (LON:BARC) Plc strategists.
The bank suggests investors stick with bets for Italian bonds to outperform Spanish peers, a position it first recommended before the former European Central Bank President was lined up as the next premier. It’s targeting a spread between the two nations’ 10-year yields of below 30 basis points, from a three-year low of 38 currently.
“Italian policy uncertainty could meaningfully decline in the near term under a Draghi-led government,” wrote strategists led by Cagdas Aksu in a note to clients. “There is still room for further outperformance.”
Italy’s debt markets have been on a whirlwind rally on expectations that Draghi will stave off a political crisis in the country following the collapse of the ruling coalition last month. He has won near-unanimous support from across parliament to head up a new government. Ten-year yields fell to a record low of 0.5% Tuesday, while the spread over German bonds is at its lowest level in over five years.
Read more: Draghi Keeps Italy Guessing on Which Super Mario Will Emerge
The Barclays analysts also think Draghi’s appointment could be seen as a positive development by ratings agencies. Moody’s Investors Service warned earlier this month that Italy was one of the biggest concerns in Europe over the next five years.
Under a Draghi-led government, Italy will likely make “meaningful” progress in its vaccine campaign and recovery plan over the course of 2021, Aksu wrote. “This in turn could position Draghi as a candidate for the Italian presidency in 2022, which could potentially be another positive development for BTPs.”
©2021 Bloomberg L.P.