The strong sell-off on Italian government bonds continues. The session for the Italian secondary market began with sharp falls on the price side, in line with yesterday’s trend following the ECB meeting from which decidedly «hawkish» tones emerged. Traders rushed to sell fearful of the prospect of further interest rate hikes a few months after the start of the dreaded Quantitative Tightening (QT), i.e. the process by which Frankfurt will get rid of the huge amount of bonds bought over the years to provide liquidity to the financial market when economies were in trouble. The QT will start in March. Italy’s failure to ratify the Mes safeguard mechanism also weighs on the overall climate.
Thus in mid-morning, the rates on ten-year bonds rose to 4.3% after yesterday’s 4.15% and were worse than the same duration in Greece which moved slightly above 4%. Last week the yield of the BTP was in the 3.80% area. At the same time this morning the Btp/Bund spread is making a strong comeback to 217 points.
All issues are down on the price side. Large losses are also recorded by Btp Italia, instruments designed for small savers. To give an example, the volatility of these days has brought the price of the last issue of Btp Italia last November to 97, a level which means a loss in the portfolio of 3% for those who sell now.
For analysts, the situation of instability is destined to persist. “Our target is a BTP/Bund spread of 220 basis points at the end of the first quarter of 2023,” says Annalisa Piazza, Fixed-Income Research Analyst at MFS Investment Management.
According to the expert, “the ECB is committed to continuing to increase rates significantly, at a constant rate and to keep rates in restrictive territory until the medium-term inflation target returns to target”. Furthermore, “the announcement of the details of the first phase of the QT is somewhat of a surprise, but it allows markets to start pricing in advance future changes in net supply”.
The expert states: «the ECB appears to be extremely concerned that inflation expectations are spiraling out of control. Forecasts of a shallow recession seem too optimistic to us, even considering that the energy crisis is far from over.
If we add to this the slowdown in growth and the fluctuations in the bond supply, it seems that the most likely path is that of a further widening of spreads in the next year».