Italian Elections Impact on Bond Markets

Capital Markets - Structuring
Desk Rates Inflation
Cristiana Corno +39 02 72612754

What we are looking at
Trading the Italian electoral cycle Published and data as of: 1 February, 2013

We thought it could be interesting to review the behaviour of Btps into election cycles, both versus Germany and curve
wise. In the following, we focus on the Btp-Bund spread and curve movements in election proximity.
We have analyzed the election cycles spanning from 1994 onwards (Government, Regions, Province and European
elections, data from http://elezionistorico.interno.it/index.php?tpel=P ) and observed the behaviour of the Btp-Bund and
slope spreads, in the proximity of the election day, using an interval of 10, 20, 30 business days prior and after.
In table below, we summarize the election day date and the pivotal range used.

BUSINESS DAYS PRIOR AFTER
ELECTION DAY DATE -10 -20 -30 10 20.00 30
27-Mar-94 Govt 14-Mar-94 28-Feb-94 14-Feb-94 8-Apr-94 22-Apr-94 6-May-94
12-Jun-94 Eu 30-May-94 16-May-94 2-May-94 24-Jun-94 8-Jul-94 22-Jul-94
23-Apr-95 Regions 10-Apr-95 27-Mar-95 13-Mar-95 5-May-95 19-May-95 2-Jun-95
21-Apr-96 Govt 8-Apr-96 25-Mar-96 11-Mar-96 3-May-96 17-May-96 31-May-96
13-May-01 Govt 30-Apr-01 16-Apr-01 2-Apr-01 25-May-01 8-Jun-01 22-Jun-01
11-Nov-01 Regions 29-Oct-01 15-Oct-01 1-Oct-01 23-Nov-01 7-Dec-01 21-Dec-01
12-Jun-04 Province 31-May-04 17-May-04 3-May-04 25-Jun-04 9-Jul-04 23-Jul-04
4-Mar-05 Regions 18-Feb-05 4-Feb-05 21-Jan-05 18-Mar-05 1-Apr-05 15-Apr-05
3-Apr-05 Province 21-Mar-05 7-Mar-05 21-Feb-05 15-Apr-05 29-Apr-05 13-May-05
17-Apr-05 Regions 4-Apr-05 21-Mar-05 7-Mar-05 29-Apr-05 13-May-05 27-May-05
8-May-05 Province 25-Apr-05 11-Apr-05 28-Mar-05 20-May-05 3-Jun-05 17-Jun-05
9-Apr-06 Govt 27-Mar-06 13-Mar-06 27-Feb-06 21-Apr-06 5-May-06 19-May-06
28-May-06 Province 15-May-06 1-May-06 17-Apr-06 9-Jun-06 23-Jun-06 7-Jul-06
5-Nov-06 Regions 23-Oct-06 9-Oct-06 25-Sep-06 17-Nov-06 1-Dec-06 15-Dec-06
27-May-07 Province 14-May-07 30-Apr-07 16-Apr-07 8-Jun-07 22-Jun-07 6-Jul-07
13-Apr-08 Province 31-Mar-08 17-Mar-08 3-Mar-08 25-Apr-08 9-May-08 23-May-08
13-Apr-08 Govt 31-Mar-08 17-Mar-08 3-Mar-08 25-Apr-08 9-May-08 23-May-08
14-Dec-08 Regions 1-Dec-08 17-Nov-08 3-Nov-08 26-Dec-08 9-Jan-09 23-Jan-09
7-Jun-09 Province 25-May-09 11-May-09 27-Apr-09 19-Jun-09 3-Jul-09 17-Jul-09
7-Jun-09 Eu 25-May-09 11-May-09 27-Apr-09 19-Jun-09 3-Jul-09 17-Jul-09
28-Mar-10 Province 15-Mar-10 1-Mar-10 15-Feb-10 9-Apr-10 23-Apr-10 7-May-10
28-Mar-10 Regions 15-Mar-10 1-Mar-10 15-Feb-10 9-Apr-10 23-Apr-10 7-May-10
30-May-10 Province 17-May-10 3-May-10 19-Apr-10 11-Jun-10 25-Jun-10 9-Jul-10
15-May-11 Province 2-May-11 18-Apr-11 4-Apr-11 27-May-11 10-Jun-11 24-Jun-11
16-Oct-11 Regions 3-Oct-11 19-Sep-11 5-Sep-11 28-Oct-11 11-Nov-11 25-Nov-11

Table1. Election day date and pivotal range

Btp-Bund spread
We have, then, looked at the move in Btp-Bund spread 10y maturity, for the period centred on the election date day
(respectively -10/+10, -20/+20, -30/+30. -10/+20, -10/+30 business days) and looked for clues on direction and
volatility.
First observation is that volatility has generally increased.
We got to this conclusion, by comparing the move in the centred range versus the average move in an interval of the
same length in the year preceding the election (as an example, for the period -10/+10, we have compared the move in
the election period to the average move in a 20 business days interval, using the 250 observations prior to the election
day).

All data are derived from Bloomberg database and elaborated by Banca IMI



In chart below, we plot the ratio between the observed move into election period (-10/+10 business days) versus the
average move in a 20 business days interval (averaged on the preceding 250 observations).
16.00%

14.00%

First observation:
12.00%
volatility increases
in election periods
10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
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Chart1. Volatility increases: ratio of move in electoral period versus average move in same length intervals.

We have, then, looked at spread direction in the pivotal interval and obtained the table below.

ELECTION DATE 10/-10 20/-20 30/-30 20/-10 30/-10
27-Mar-94 Govt -58.60 -65.60 -36.70 -75.40 -74.50
12-Jun-94 Eu 52.70 106.90 113.30 72.60 75.60
23-Apr-95 Regions -54.50 -101.10 -51.60 -96.20 -59.10
21-Apr-96 Govt -85.30 -103.20 -105.10 -96.00 -105.50
13-Jun-99 Eu -1.60 2.47 -0.78 -5.93 -8.28
13-May-01 Govt -3.02 -3.29 -4.14 -2.38 -1.05
11-Nov-01 Regions -0.31 -2.45 -10.79 -1.13 -8.32
12-Jun-04 Province/Eu -0.40 -3.10 -3.90 0.10 0.20
4-Mar-05 Regions 0.80 3.00 3.70 2.80 4.40
3-Apr-05 Province 3.60 6.30 5.30 4.80 4.30
17-Apr-05 Regions 2.90 4.30 9.70 2.40 6.30
8-May-05 Province -2.00 8.50 7.60 6.40 5.50
9-Apr-06 Govt 4.60 3.10 7.90 2.10 1.00
28-May-06 Province -0.30 -1.10 -2.30 -0.20 -1.30
5-Nov-06 Regions -3.50 -3.40 -2.10 -3.20 -2.60
27-May-07 Province -2.20 -1.10 -0.70 0.20 0.80
13-Apr-08 Province/Govt -5.20 -16.20 -2.90 -3.80 -8.40
14-Dec-08 Regions 9.38 29.40 35.58 5.86 29.72
7-Jun-09 Province/Eu 28.02 21.00 -12.61 25.01 20.99
28-Mar-10 Province/Regions 3.63 7.81 61.18 15.10 67.46
30-May-10 Province 42.54 53.01 51.68 43.15 35.25
15-May-11 Province 30.04 30.18 75.58 37.00 67.95
16-Oct-11 Regions 12.14 77.45 128.77 83.77 127.31
Table2. Election intervals and Btp_bund 10y spread historical behaviour




On average, the widest move is observed in the interval -30/+30 business days, followed by the interval -10/+30.
Given we are nearing the latter period, we have looked, in details, at what has happened, historically, in the range
-10/+30 business days. In histogram below, we plot the distribution of the spread move.
The expected value, using history, is 13 bps widening.
Therefore, second observation is that, in electoral periods, the average behaviour is widening of the Btp-Bund
spread 10y maturity.
35.00%

30.00%
In the -10/+30
25.00%
business days
period we,
20.00% historically, observe
an average
15.00% widening of 13 bps
with some skew on
10.00% the upside.

5.00%

0.00%
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50

30

10

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30

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70

90
-9

-7

-5

-3

-1

11

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25

27
-1

-1

-1

Chart2. Histogram of spread move in the -10/+30 electoral period.

Btp 10s-2s
We have re-run the analysis looking at curve behaviour, 10s-2s, and found that flattening is the trade into election,
with the biggest move in the -30/+30 period, followed again by -10/+30 period and an average flattening of 12 bps.

Btp 10s-2s Average Move 0.44 -3.70 -16.50 -2.60 -11.95
ELECTION DATE 10/-10 20/-20 30/-30 20/-10 30/-10
27-Mar-94 Govt -4.50 -23.20 6.10 -19.10 4.30
12-Jun-94 Eu -29.70 28.10 45.30 -28.30 -38.50
23-Apr-95 Regions -2.00 6.00 -31.60 -19.60 -20.50 In the -10/+30 business days
21-Apr-96 Govt 16.80 7.60 -10.10 14.10 8.10
period we, historically, observe an
13-Jun-99 Eu 4.80 17.80 25.30 18.90 2.10
13-May-01 Govt 34.44 32.19 19.04 36.33 35.18 average flattening of the 10s-2s
11-Nov-01 Regions -18.49 -12.12 -9.48 -10.15 -1.28 segment of 12 bps.
12-Jun-04 Province -7.10 -3.20 -18.90 -3.70 -6.80
12-Jun-04 Eu -7.10 -3.20 -18.90 -3.70 -6.80
4-Mar-05 Regions 5.40 -1.60 -7.40 -13.40 -12.20
3-Apr-05 Province -17.20 -17.10 -20.00 -15.40 -22.90
35.00%
17-Apr-05 Regions 4.70 -22.90 -12.40 -2.80 9.40
8-May-05 Province -4.80 5.20 9.60 4.90 6.40 30.00%

9-Apr-06 Govt 13.50 4.60 23.60 8.20 15.80
28-May-06 Province -8.00 3.70 -22.80 -9.50 -21.30 25.00%

5-Nov-06 Regions -16.30 -11.90 -18.70 -14.50 -16.90
20.00%
27-May-07 Province 4.50 14.20 4.00 12.50 8.00
13-Apr-08 Province -15.80 -37.80 -56.60 -12.60 -33.00 15.00%

13-Apr-08 Govt -15.80 -37.80 -56.60 -12.60 -33.00
14-Dec-08 Regions 22.48 24.65 72.57 60.30 112.04 10.00%

7-Jun-09 Province 21.10 6.11 27.76 -2.87 0.51
5.00%
7-Jun-09 Eu 21.10 6.11 27.76 -2.87 0.51
28-Mar-10 Province 9.95 -2.21 -62.34 5.60 -63.26 0.00%

28-Mar-10 Regions 9.95 -2.21 -62.34 5.60 -63.26 -180 -165 -150 -135 -120 -105 -90 -75 -60 -45 -30 -15 0 15 30 45 60 75 90 105 120 135 150 165 180

30-May-10 Province -10.91 -25.76 -46.87 -20.37 -9.35
Chart3. Histogram of 10s-2s behaviour the -
15-May-11 Province 5.33 9.11 -64.85 11.04 -3.84
16-Oct-11 Regions -4.55 -64.22 -186.62 -56.09 -172.13 10/+30 electoral period.
Table3. Election intervals and Btp 10s-2s spread.




Rerunning the analysis on the 10s-5s segment, we get that the average move is flattening of around 6 bps, while the
30s-10s segment has been, on average, unchanged.

Summarizing, looking at past behaviour into election cycles, we found that in the period -10/+30 business
days centred on election day date:
1. Volatility generally increased;
2. The move in the Btp-Bund spread 10y maturity, in electoral periods, exacerbated the trend in
place, but, on average, widened;
3. Flattening was the move, REGARDLESS OF DIRECTION, and it was mainly concentrated
on the 10s-2s segment.




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