BTP, sword of Damocles BCE: the real threat
BTP and BTP-Bund spread grappling with the declarations that continue to arrive from ECB officials. Today they talked Isabel Schnabel and Francois Villeroy de Galhauboth members of the Governing Council of the Eurotower, she is German, he is French.
In particular, Villeroy said he believes euro area interest rates will “probably” test the peak during the summer, and that “definitely” there will be no cuts during the year.
Isabel Schnabel, hawkish exponent of the ECB, stunned for her part hopes of an imminent about-turn in Eurozone inflation:
“We are still a long way from being able to claim victory. A broad disinflationary process has not even begun in the euro area. If we look specifically at core inflation, we see that it is very high and more persistent than headline inflation. And developments in underlying inflation play an important role in our considerations”.
The words of Schnabel and Villeroy came later the good news announced yesterday by the Treasury (Mef, Ministry of Economy and Finance), relating to the results of the issuance of the 30-year BTP.
The outcome of the placement was excellent, which saw the protagonist above all the boom in demand from foreign investors and overall requests exceeding the amount offered by more than 5 times.
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For now, the demand for Italian paper remains solid, in view, among other things, of the new BTP Italiathe government bond indexed to the national inflation rate designed for individual savers, the issue of which will take place from Monday 6 to Thursday 9 March 2023.
Being aimed at the retail investor audience, the BTP Italia will provide crucial information to the government of Giorgia Meloni, all intent, according to various rumors, on creating a defined BTP Autarkic or even sovereign BTP.
The real threat to BTPs
Beyond the fluctuations of the BTP-Bund spread and of the BTP rates, the question of the sustainability of the Italian debt remains the protagonist on the markets, as it highlights an analysis by Reuters.
However, the analysis points out that the real danger, for BTPs, is represented not so much from the rise in yields – which analysts forecast for next year, on average, around 5% for 10-year BTPs – but from another important element.
This element is volatility: something that the ECB is primarily fueling, due to the declarations which, depending on their dovish or hawkish origin, punctually end up with confusing market players.
Statements from Fed Chair Christine Lagarde and her colleagues are making it actually difficult, for “Rome’s debt managers”, be able to predict the so-called ‘yield curve’, which presents the yields of the BTPs, which differ according to their maturity.
“The most important factor, for the next 12-24 months, will be the shape and volatility of the yield curve, much more than the absolute level of returns”Filippo Mormando, European sovereign debt and rates strategist at BBVA, told Reuters.
And this is because the rhetorical uncertainty of the ECB in recent months has led the bond markets to what the UniCredit fixed income strategist, Francesco Maria Di Bella, has defined “rollercoaster”.
Just think, reminds the Reuters news agency, that rates on 10-year BTPs slipped by as much as 40 basis points following the latest ECB meeting on February 2, before bouncing 15 basis points the following day.
Few years ago, even a fluctuation of 5 basis points per day in BTP rates would be considered important.
In the light of this uncertainty, Italy would thus be aiming to lengthen the maturity of the BTPs and to incentivize retail investors to participate in the underwriting of government bonds.
On the other hand, if with the words of the ECB “Should the 3-year BTPs end up yielding like a 10-year BTP, the BTP with the shorter maturity would in fact become more attractive to investors, thus making it necessary to intervene in its public debt issuance strategy, in order to meet the demand”, reads the Reuters analysis.
Schnabel effect: BTP-Bund spread at record 2 February
Today, the words of the German falcon Isabel Schnabel were immediately priced by investors, who hastened to unload BTP &a Co.
The result is that, according to Bloomberg’s findings, 10-year Bund rates shot up 9 basis points to 2.57% one step away from the record since 2011.
Schnabel clearly stated that “there is a risk that inflation will prove to be more persistent than what the financial markets priced in”.
The sell-off on BTPs led 10-year rates to rise to around 4.5%, thus triggering the BTP-Bund spread to 190 basis points, a record since 2 February.
A flight from government bonds, that of the last few hours, which has not only affected the Eurozone: the Fed anxiety, fomented by the latest statements by Loretta Masterpresident of the Cleveland Fed – who has called for US fed rates above 5% – and the president of the St Louis James Bullard – who also relaunched number 50 – triggered the sell-offs on Treasuries, triggering 10-year US yields beyond the 3.9% threshold, to 3.93%, a record since 10 November 2022.
All this, while a roundup of data continues to arrive from the US macro front, forcing Jerome Powell’s Fed to stay alert:
the latest disillusionment, for the Stock Exchange and US Treasuries, came yesterday, with the publication of measured inflation January Producer Price Index.
In short, macro data is rowing against central banks, perhaps the first to be surprised by such a persistence of inflationary pressures, even if in Europe there is no shortage of voices of those who urge not to exaggerate with monetary tightening.
This is the case of the other member of the Governing Council of the ECB Fabio Panetta, who also mentioned Lucio Battisti yesterdayemphasizing that We must not “driving like a madman with the lights off in the night”.
“In all scenarios, we see a much-needed 50 basis point rate hike,” insisted Isabel Schnabel, in her interview with Bloomberg and published on the ECB website. When asked whether economists and investors are right in predicting that rate hikes will stop once the 0.5% deposit rate level is reached, Schnabel replied:
“Markets price perfection. They believe inflation will drop very fast towards 2% and that it will stay there while the economy continues to do well. This would be a really good result, but there is the risk that inflation will prove to be more persistent than currently priced in by the financial markets”.
Isabel Schnabel thus warned that the ECB “may have to act more forcefully” to bring down the growth of inflation.
Going back to the Reuters analysis, and to the volatility risk for BTPs, however, according to some experts, it would perhaps be appropriate for the ECB officials to agree on the monetary policy line they intend to pursue. Villeroy himself today, in taking the floor, admitted that the European Central Bank must try to communicate in a more predictable way.