Outlook BTP but also on the BTP-Bund spread, amid further rate hikes by the ECBin a context of still very high inflation in the euro area, and in the face of the significant issues that the Treasury-MEF and also Germany will have to launch.
The analysts of Mps Capital Services they dedicate within their “Outlook 2023: from inflation to recession, the reaction of central banks” an in-depth study also of BTPs and, in general, of Italian paper, writing that “2023 (especially the beginning) will be particularly delicate in terms of the supply of Italian government bonds”.
“Effectively – they underline – the Treasury will have to refinance around 260 billion euros of maturing securities (a substantial amount when compared with the approximately 225 billion which were due this year) in addition to the additional deficit (equal to about 90 billion euros)”.
“All of the above considered net of PNNR transfers (about 20-25 billion) should lead to issues of around 320 billion euro of medium/long-term securities – the experts specify – with the risk of an upward revision should the economic situation turn out to be more negative than expected. In fact, we recall that in the Nadef the Government has forecast real growth of 0.6% for 2023”.
The outlook on new debt issues was just recently issued by the Mef itself, in the Public debt management guidelines for 2023: the report illustrated the great challenge for BTP & Co.
Commenting on what emerged, Mps Capital Services explained that, “to make the context even more challenging, the fact that supply pressures come in a context where demand is likely to be weaker”.
And here the reference, of course, is to the new face less salvific, towards Italy but also towards all the other member countries of the euro area, towards the ECB by Christine Lagarde:
“Primarily due to the lower ECB support, which will gradually cease given the start of the Quantitative Tightening “. confirmed by Mps Capital Services, whose only announcement by the Eurotower made rates on BTPs and the BTP-Bund spread soar, leading the Italian ten-year yields to exceed even those of the Greek bonds.
“According to data provided by Bank of Italy, the amount of maturing Italian securities within the PSPP portfolio amounts to approximately 40 billion euro for 2023, about half of which should not be reinvested“.
BTP: domestic investors, for now, are not accumulating
But experts point out that “even the decumulation trend of domestic investors does not seem to show signs of reversal, at least for the moment”.
And that’s not all: according to the latest data, foreign investors are also fleeing: in its monthly publication, Bank of Italy has announced in particular that foreigners reduced their exposure to Italian bonds by 2.3 billion euros in October, after cutting their shares by as much as 13.2 billion euros in September alone.
The decumulation, i.e. divestment of BTPs by domestic investors, is part of a context in which the Meloni government clearly revealed the objective of launching a real call to arms, aimed at convincing Italians to subscribe to more BTPs and therefore to buy made in Italy debt. So much that has been talked about sovereign BTP or autarkic BTP: in short, a BTP packaged only for Italians, somewhat in the style of BTP Italia and BTP Futura.
“Historically – explained by Mps Capital Services – (the decumulation phase) she accompanied herself to a widening of the spread”.
So what is Mps Capital Services’ outlook on rates and on the BTP-Bund spread?
“The combination of increased supply and weak demand in a context of a still aggressive ECB should lead to a further upward leg on BTP yields (ten-year period towards the recent highs in the 5% area) and a further widening of the spread (Btp-Bund verso i 250 pb) in the very first part of the year. Subsequently, with a view to the end of 2023, the ten-year BTP should return to listing around 4%”.
If we look at the BTP rates, we can already say that the 5% threshold is not only not far off, but it is getting closer and closerso much so that yesterday 10y rates jumped to more than 4.6% compared to last Friday’s 4.47%, compared to a BTP-Bund spread rising to around 211 basis points.
An article by Reuters, in this regard, highlights that 10-year BTP rates have soared by 66 basis points since the beginning of December reporting the strongest monthly jump since last August.
The flare-up, of course, is not sparing the yields of other government bonds in the euro area either, which will soon be orphaned – albeit gradually – of the help from the ECB.
Yesterday two-year German Bund rates, more sensitive to changes in interest rate expectations, rose as high as 2.714%, highest value since 2008, while 10-year Bund rates shot up +11 basis points to 2.503%, close to the record since 2011 tested in October, at 2.532%.
Today, the BTP-Bund spread rises to 212 basis points, vs ten-year rates around 4.59%.
The words uttered last Monday by the hawk of the ECB, the Dutch central banker, still resonate Glass Knot, who said the ECB will continue to raise rates in the coming months, warning that the risk that the Eurotower does too little to fight inflation remains the main one.
Mps Capital Services analysts also present l’outlook sui Bund.
Bund: normalization of the asset swap spread in 2023
“The first quarter of next year – predict the experts of Mps Capital Services – we could still see one last bullish leg in Bund yields towards recent highs resulting from:
- ECB attitude still hawkish in a context of still high inflation and mild recession,
- Repricing of operators in view of the start of the QT in March.
- Strong supply coming in the medium-long term (over €315 billion vs €230 billion this year)
“After this first phase of upswing which could bring the yield back to the recent highs (with possible overshooting in the 2.75% area), the 10-year yield should begin the inversion phase which could bring it back towards the 1.8% area”.
“In 2023, moreover, we should see a normalization of the asset swap spread which this year went as low as -100bps due to the shortage of collateral resulting from the huge ECB purchases made with PEPP. In 2023, in fact, this problem should partly be resolved considering: 1) strong increase in net emissions (approximately €130 billion); 2) reduction of the card held by the ECB with the QT; 3) expiry of the TLTRO operations which will free up approximately €390 billion (data at the end of Q3 2022) of Eurozone government bonds used as collateral. Therefore the spread should normalize and return to trading at the levels seen in the last ten years above -50p”.