Italy CDS – watch the ISDA basis

This year was widely touted by many – including yours truly – as the year of political risk. As we now know it didn’t turn out that way. Emmanuel Macron fought off the challenge of the National Front, Mark Rutte was re-elected as Dutch Prime Minister and Italy didn’t hold yet another general election. CDS spreads duly recovered and look set to end 2017 close to multi-year tights.

But Italy may yet act as a catalyst for volatility in 2018. Reports that elections are to be held on March 4 led to Italy’s sovereign CDS widening from 112bps to 115bps. It wasn’t a massive move – Italy’s legislative five-year term was due to end next year, making an election inevitable – but it served as a reminder that political risk hasn’t been, and can never be, eliminated.