BTP yields likely to rise further, but contagion risk low

Italian bonds have come under renewed pressure after the government announced plans to loosen fiscal policy by more than markets anticipated over the coming years. We think that Italian bond yields will continue to trend higher as we expect the budget deficit to be even wider than the government envisages. But provided that Italian politicians’ commitment to the EU and the euro doesn’t waver, we think that contagion to other European bond markets will remain limited, for now at least.