Government bond yields have declined substantially in Italy on the back of ECB’s 3Y LTRO as well as the commitment of the new government to austerity. Yet, leading indicators have slumped to a post crisis lows and sustainable growth seems far away as ever.

Amid the almost weekly downgrades of European sovereign debt ratings commentators have fixed their gaze on the fact that Italy has gotten one downgrade less than Spain as well as the country’s bonds have been performing better at auctions.

(quote Bloomberg)

With about 450 billion euros of debt to sell this year, Italy’s Prime Minister Mario Monti is taking steps to lure investors by spurring the economic growth needed to reduce the euro-region’s second biggest debt load after Greece. Ten-year yields have dropped about 2 percentage points from as high as 7.48 percent in November after Monti replaced Silvio Berlusconi. They fell three basis points to 5.57 percent today. Italy “managed to sell the maximum target they had in mind which is a good sign,” said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. “Moody’s downgrading the country was really not a factor that went against it because it probably was already priced in and people are still thinking that the government is going to make the right reforms to put the country into potential growth and a better situation.”

Unfortunately and despite the indication that the Italian prime minister may be luring investors to buy Italian government debt, growth is not the main incentive.

The OECD’s leading indicator index for Italy has consequently collapsed to a post crisis low even as leading indicators in Greece and Spain have improved. This suggests that while the market may seem to reward austerity today with low borrowing costs, it only pushed forward the problem in the form of absence of growth.

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