Changing governments is not a new phenomenon in Italy.
The country has seen 66 different governments since World War II, an unfortunate feature that has made it very difficult for any one government to introduce sustained reforms and boost Italy’s long-languishing productivity.
However, in the last week investors have cheered the prospect of a new coalition being formed between two parties from the political left: the populist and originally anti-establishment Five-Star Movement (M5S) and the more European-friendly PD (Democratic Party).
Ten-year Italian bond yields have hit fresh three-year lows, breaking through a 200 basis point yield differential to Germany on the anticipation of a more Europhile Italian government as well as another potential round of quantitative easing from the European Central Bank in September, which would also be supportive for bonds.
But M5S leaders and PD have been very critical of each others’ policies in the past and make for unlikely bedfellows.
