Until this morning, outgoing Italian PM Mario Monti and leading center-left candidate Pier Luigi Bersani had been expected to carry enough votes to form a pro-austerity government in the Italian elections over the past two days. Markets were expected to cheer the result as such a government would generally be perceived as decreasing the risks to EU instability, helping stocks and hurting safe-haven debt like US Treasuries, and by extension, MBS. Indeed, that was the tone of the morning and of the first 30 minutes after polls closed in Italy at 9am New York time, but since then, center-right candidate and former Prime Minister Silvio Berlusconi has closed the gap in polls, in several cases pulling ahead. This was the best possible outcome for bond markets and the worst for global equities and Italian debt. With respect to the latter, Italian 10yr yields are up a full quarter of a point since 9:30am. S&P's have shed 15 points since hitting their highs and US 10's are down 7bps from their highs, moving to the lowest yields since February 1st's NFP day. MBS have bounced back into positive territory after opening weaker.
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Bonds Bounce Back On Waxing Italian Election Uncertainty
A full-scale risk reversal is underway as Italian election polls stream in, showing center-right candidate Berlusconi with a marginal lead. This runs counter to previous expectations and even to early polling figures suggesting center-left Bersani would get the nod.
The effects on bond markets have been everything we'd expect from any sort of "Berlusconi > Bersani" information in that it's grounds for a bit of flight-to-safety buying in Treasuries and Bunds at the expense of Italian debt and equities markets. Everything has been shockingly logical thus far, but we don't yet know how much more room there is to run if the Berlusconi lead extends or how much bounce back into weaker levels we'd see if it evaporates.
US 10's are down to 1.9653 and Fannie 3.0 MBS are up to 'unchanged' levels at 102-31+. For an idea of the pace of the movements, since bottoming out at 4.19 after the first polls, Italian 10's are up to 4.34 now (as these move higher, German and US debt tend to move lower).
Bond Markets Weaker As Italian Exit Polls Start Hitting
Italian election results are generally living up to the hype with markets breathing a collective sigh of relief after the first exit polls show austerity-friendly Bersani with a wide enough lead to form a government. Polls closed at 9am Eastern time and Italian 10yr yields dropped from 4.3 to 4.24 in just under 3 minutes.
Throughout the overnight session Italian 10's have been in an almost perfectly inverse tango with German and US debt with the latest move hurting Bunds more but lifting US 10's over 2.0%. Clearly, markets were waiting for elections results more than anything this morning and clearly, a Bersani victory hasn't been fully priced in.
10's are currently right at 2.00% and Fannie 3.0s are down 6 ticks on the morning at 102-26 after opening at 102-27 and trading a narrow 3 tick range so far. S&P futures are up nearly 10 points from Friday's 4pm levels.
There's no significant domestic economic data today and Italian elections are expected to continue to be the morning focus. As we've noted, Bersani should have been largely priced in so we don't necessarily expect a challenge to the higher yield ends of the range in 10's, but there may be some additional volatility before (and slightly after) election results are confirmed.
Live Chat Featured Comments
Victor Burek : "cant count out Berlisconi"
Matthew Graham : "RTRS - ITALY CENTRE RIGHT LEADING IN SENATE RACE WITH 31 PCT AGAINST 29.7 PCT FOR CENTRE LEFT - SKY TV PROJECTION "
Matthew Graham : "here's Bunds (Germany 10's) in green, US 10's in yellow and BTP's (Italian 10's) in teal: http://tinyurl.com/azm4jqo"
Matthew Graham : "well, it looks pretty good in and of itself MD, but purely event-driven and not a technically-driven move (which may be your point in the first place?)"
Mike Drews : "so don't look too far into the rejection of 2.00?"
Matthew Graham : "polls getting closer, BTP's rising, Bunds/TSY's falling. "
Matthew Graham : "RTRS- ITALY CENTRE RIGHT LEADING IN SENATE RACE OVERALL ON 31 PCT, CENTRE LEFT 29.5, GRILLO 25.1 - RAI PROJECTIONS AFTER VOTE COUNTING BEGINS "
Victor Burek : "boehner having news conference at 4pm on sequester"
Gus Floropoulos : "thanks MG/VB...keep confusin those oni's and ani's"
Victor Burek : "berlusconi would be good for us as he is anti austerierty"
Matthew Graham : "no, Bersani is good for stability, therefor bad for us."
Gus Floropoulos : "MG, Berlusconi would be bad news for us...potentially, correct?"
Matthew Graham : "Italian 10yr yields down 6 bps in 3 minutes"
Matthew Graham : "RTRS - ITALY CENTRE-LEFT SEEN AT 34.5 PCT IN LOWER HOUSE, BERLUSCONI COALITION 29 PCT, GRILLO 19 PCT, MONTI 9.5 PCT - SKY TV PHONE POLL AFTER VOTING CLOSES IN ITALY ELECTION"
Victor Burek : "seems europe is pricing in the italian elections going there way"
Victor Burek : "japan rallied due to weaker yen"
Victor Burek : "manufacturing data out of china was weak"
James Barnes : "Why was Europe/Asia strong? DAX doing well"
Jay Waters : "GM all - Europe and Asia both strong overnight. US Stocks to follow ? = rough day for MBS?"
Matt Hodges : "i can tell you one thing it doesn't hold - NFP, since Friday is the 1st"
Oliver S. Orlicki : "Let's see what this week holds for us"