EUROPEAN investors may finally be hardened to the debt crisis after three years of turmoil.
Even Silvio Berlusconi’s bid to become prime minister barely registered a blip. Italian government bonds climbed on Tuesday, rebounding from the previous day’s slump. And Spain exceeded its maximum target at a bill sale.
If Italy’s political skirmish "happened six months earlier, we’d have expected contagion", said John Bilton, a European investment strategist at Bank of America Merrill Lynch.
Investors are still betting on European Central Bank (ECB) president Mario Draghi to keep the peace after his September pledge to buy the bonds of governments willing to sign up to reform. While none has so far, traders see the Draghi pledge as a reason to limit the sale of stocks and bonds when new eurozone flashpoints erupt.
"The Draghi ‘put’ remains," said Geoffrey Yu, a currency strategist at UBS in London. "Markets continue to take eurozone event risk in stride."
A put option gives investors the right to sell an asset for a predetermined price.
That marks a reversal from the past three years in which investors recoiled from the debt of Europe’s cash-strapped nations amid Greek-led turmoil. Policy makers’ failure to contain concerns and a resulting austerity-push tipped the region back into recession, drove unemployment to a record 11.7% and raised questions about the euro’s longevity.
A day after Mr Berlusconi’s bid for a fourth election victory as premier undermined markets by raising questions about Italy’s austerity drive and strength of government, the nation’s 10-year bond yield declined nine basis points on Tuesday to 4.72%.
"You can see the calming effect the ECB’s actions have had on the market," said Jacques Cailloux, chief European economist at Nomura International in London. "The political situation in Italy would have caused a much larger market move a year ago."
A test of the stabilis ation came on Wednesday when Italy sold as much as €6.5bn of one-year bills. It will auction as much as €3.5bn of three-year notes on Thursday. In Spain, bond yields slid after the government sold a combined €3.89bn of 12-month bills at an average yield 2.556% and 18-month debt at 2.778%.
BofA Merrill Lynch ’s Mr Bilton predicts bond yields in Europe’s so-called periphery will peak in the first quarter as Spain signs up to the reforms needed to trigger the ECB’s bond-buying and Italy’s election passes. They forecast the Euro Stoxx 50 i ndex will rise to 3,000 next year from 2,624.03 on Tuesday.
Signalling increased confidence in Germany, the ZEW Centre for European Economic Research on Tuesday said its index of investor and analyst expectations climbed to 6.9 in the region’s largest economy, from minus 15.7 last month. The gauge was the highest in seven months. Analysts expected the index — which aims to predict economic developments six months in advance — to rise to minus 11.5, according to the median of 38 estimates in a Bloomberg survey.
The data "supports our view that weakness in the German economic outlook isn’t expected to last long", said Gizem Kara, a European economist at BNP Paribas in London.
Investors also are showing greater faith in the euro’s ability to hold together. Almost three quarters of investors surveyed by Barclays said no country would leave the eurozone in the next year. Only 42% said the same in June. And even if Greece quits, only 6% said another nation would follow, the poll released this week showed.
Not all are confident. Robin Marshall, director of fixed-income at Smith & Williamson Investment Managers in London, said the rally in Italian debt was over and its bonds would suffer amid the election and signs of economic pain. Italian bonds returned 18% this year to December 10, according to indices compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 4.3% and Germany’s rose 4.2%.
"You’ve seen the bulk of the rally," said Mr Marshall, who helps to manage the equivalent of $19bn. "If it blows up in Italy, I’m sure it’ll blow up in Spain."
Nick Kounis, head of macro research at ABN Amro Bank in Amsterdam, is betting Mr Draghi’s outright monetary transactions programme has been enough for now. Economists at Deutsche Bank say the ECB may offer fresh support in the form of lower interest rates by April.
"The programme is ultimately a gamechanger, which means we’re unlikely to return to the dark days of the crisis," Mr Kounis said.