Italy revises controversial budget plan and expects EU standoff to come to an end

Italian bond yields continued to fall for a second day after government revised its controversial budget plan and expected the EU to be satisfied with the changes.

Prime Minister Giuseppe Conte said Rome had cut its deficit target for 2019 to 2.04 per cent of GDP from its original 2.4 per cent.

Conte said he expected the European Commission to accept the new budget plan, bringing the intense standoff between the two to an end.

The EU rejected Italy’s initial budget plan, which contained a deficit target of 2.4 per cent of GDP and a growth forecast at 1.5 per cent and opened disciplinary measures last month.

The country’s ten-year bond yield fell to 2.88 per cent this morning, while its five-year bond yield dropped to 1.89 per cent – both at their lowest level since the end of September.

Increased speculation that deputy prime minister Matteo Salvini was considering a snap election early next year has also helped Italian debt, with short-dated bond yields falling 12 basis points to six-month lows of 0.47 per cent – returning to the levels before the selloff on 29 May.

"I think the momentum can carry on in the near term as we have a number of supportive factors for Italian debt, beyond just the hopes the budget deal can be reached," said Commerzbank rates strategist Christoph Rieger.

Later today the European Central Bank is expected to confirm that its quantitative easing programme, which has bough €2.6tn of bonds since 2015, will come to an end this month.