On Monday 26 September 2022, the day after the elections which confirmed the victory of Giorgia Meloni, the spread between ten-year BTPs and Bunds of the same size was at 237 basis points. Today it is in a range between 130 and 135 basis points. A net decline for the yield differential since 2011, the year of the worst crisis on Italian public debt since the introduction of the euro.
The 575 basis points of the autumn of thirteen years ago are a memory, but it is not only thanks to Italy. Much less the Meloni government. The Bund interest rate, in the same period of time, went from 1.74% to 2.26%. The ten-year BTP, on the other hand, went from 4.03% to the current 3.57%. According to most managers, the continued use of retail issues, such as the BTP Valore, is also beneficial. Fewer institutional investors demanding high returns, more autarky, less exposure to the moonshine of international markets.
The process of normalization of the European Central Bank’s (ECB) monetary policy is continuing apace. The repercussions are also seen on the bond market, with yields stabilizing more or less along the entire yield curve of eurozone issuers. But, as recalled more than once by the main business houses, there is no direct correlation between the lower returns promised by the Italian Treasury at auction and good governance of the current executive, even if the spread between BTPs and Bunds is at its lowest since 2022.
«Meloni’s moderation and prudence from a fiscal perspective has certainly been beneficial, at least compared to expectations, but it is not possible to forget that generalized increases for euro area government bonds have been the norm», wrote the hedge fund Bridgewater at the beginning of January. The US bank Morgan Stanley also agreed in recent weeks. All in a eurozone context, as mentioned by Citi two days ago, which has allowed government bonds to reduce yields in the wake of the first cuts in the cost of money by the ECB. Which could arrive, barring surprises, before the summer break of work.
The yield differential between BTPs and the rest of euro area bonds is no mystery and is in any case marked. The 130 basis points gap is, according to the American Citi, a correct value but which could be susceptible to persisting upwards compared to the European teams.
Moneyfarm’s Asset Allocation team estimates that over the next ten years, BTPs will return an average return of 2.8% per year, higher than that expected for comparable government bonds issued by other countries. Specifically, three decimals more than the Spanish Bonos, seven decimals more than the French Oat and 130 basis points of increase in comparison with the German Bund, which is seen – once the monetary policy adjustment process by the ECB is completed – around 1.50 percent.
However, there is another aspect, linked to the BTP Valore. The over 50 billion euros raised by the Treasury in the three issues (June 2023, October 2023, February 2024) were a significant breath of fresh air for Via XX Settembre, even if at a high price if we consider the minimum guaranteed returns.
“In this way the Treasury avoided going into placement with international banks, which would have required higher returns given the great uncertainty on various aspects of public finances, starting with the consequences of the Superbonus”, notes a note reserved for institutional clients of the Brevan Howard hedge fund at the beginning of the year. Citadel’s vision is similar, according to which “the interest in BTPs is predominantly domestic, since there are no valid reasons to invest in them directly”. This element allows, as also recalled by Prime Minister Giorgia Meloni on “Diritto e Rovescio” on Rete 4, to have more control over the circulation of bonds. “The more part of our debt we can put into Italian hands, the more we will be masters of our destiny,” she explained.
From this perspective, the Treasury’s strategy has borne fruit. On the one hand, taking advantage of a downward trend for the ECB, since the battle against price surges is almost completely won. On the other hand, avoiding exposure to the requests of foreign investors, thus encouraging the refinancing of existing public debt by relying on the domestic component. From this perspective, it is true that the spread between BTPs and Bunds has contracted by a hundred basis points since Meloni took office at Palazzo Chigi, but it is equally true that it is the result of the combination of at least three elements. First, the actions of the ECB.
Second, the fatigue of Germany, which according to the Ifo is “paralyzed”. Third, the significant adoption of initiatives to encourage internal demand for BTPs and BOTs. The autarkic choice is rewarding for now, but it is legitimate to expect an upward retracement if the German locomotive resumes its run. The problem, net of decreasing yields and contracting spreads, will concern the growing isolation of the country. Not only on the stock market, but also on the bond market.