Italian government debt rallied on Tuesday following the revision as the Italian government amended its deficit target on Monday to avoid the threat of the Excessive Deficit Procedure.

The European Commission has threatened to open disciplinary procedures against Rome because it failed to reduce its public debt in 2018 and urged Rome to reign over its deficit in 2019 and 2020. In April Rome upwardly revised its deficit target to 2,4%, unilaterally, in violation of an agreed 2,04% target. On Monday, Rome took a step back, announcing that its deficit would be €7,6bn smaller, which corresponds to a 0,4% of GDP correction.

The result was immediate.  By Tuesday, Italian two-year bonds were on negative yield territory, reducing the cost of servicing the Italian debt, just as the European Central Bank (ECB) prepares to extend its bond-buying program.

This is the first time that Italian debt yields negative since the standoff between Rome and Brussels started in May 2018. The closely-watched spread between Italian and German two-year government bonds narrowed to as low as 0.747%, from a high of 3% in 2018.

These were not the only good news for the Italian economy on Monday, as the Italian statistical service (ISTAT) noted a marginal drop of unemployment below 10% for the first time since 2012 in May. That brings the employment rate to 59% of the active population, the highest since 1977.

Prime Minister Giuseppe Conte acknowledged on Tuesday that the revised deficit target is not the result of fiscal consolidation (austerity) measures. On the one hand, the government overestimated the cost of two flagship welfare policies (expenditure) and, on the other, underestimated tax receipts. The two new policies – namely early retirement and a guaranteed minimum income – had a small fiscal effect than originally anticipated.

However, the 2020 deficit target is still under negotiation, especially as the growth is decelerating across the Eurozone. On Monday, Rome reiterated that its 2020 deficit target remains 2.1%, as set in April. The European Commission insists that the 2020 deficit must be lower than the 2019 deficit.