The spread is the difference between German ten-year rates and those of other European countries. For investors, it is the absolute barometer of risk for a country in the monetary union. The Italian spread was around 130 points at the beginning of the year. It reached 300 points at the time of the fall of the Draghi government. It has since narrowed to 230, which was its level on Friday before the elections and on Monday, after the elections.

Antoine Bouvet, senior rates strategist at ING, said that this is a sign that the markets “have made their peace with the prospect of a government led by Giorgia Meloni.” This is all the more so as the right-wing coalition has obtained enough votes to ensure political stability, but not enough to be able to change the constitution.

In addition, the stance taken regarding the willingness to follow European budgetary rules and to keep its commitments reassures investors, according to Commerzbank. A conciliatory tone with a Europe has been considered essential to the country’s economic development. Italy should also benefit from €191bn in future allocations under the European recovery plan NextGenerationEU.

Little to fear for the euro

Bouvet expected the evolution of Italian rates to depend more on European Central Bank decisions than on the political decisions of the next Italian government. “The main driver of Italian bonds in the coming weeks and months will probably be the general tone of the financial markets. With central banks tightening monetary policy in unison, and in some cases competing with each other, carry trade investors are understandably reluctant to take advantage of the extra yields offered by Italian bonds. The ECB’s newfound optimism is particularly worrying, as is the prospect of the ECB reducing the size of its bond portfolio through quantitative tightening.”

“Italy is not a short-term concern for the euro either,” Francesco Pesole, FX strategist at ING, reckoned. “The Italian election results seem to have gone almost unnoticed in the FX market. This is partly due to the predictability of the result, but may also indicate that markets are giving Mrs Meloni the benefit of the doubt after a campaign in which she firmly reiterated her intention to respect fiscal rules and keep Italy’s external position unchanged.” The main issues for the euro in the coming months will be developments between Russia and Ukraine and the energy crisis.

This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. . Originally published in French by and translated for Delano.