There is room for a further decline in the BTp / Bund spread, which could drop to around 75 basis points and rates on Italian government bonds also fall. The rosy forecast is provided by the analysts of MPS Capital Services.
At the rally of the Italian paper to start the Draghi government, experts say, the upward movement in sympathy with core rates followed. In one scenario of lower upward pressure on rates, thanks above all to the intervention of the ECB, the Italian paper should remain well supported with the 10-year rate expected to confirm the trading range 0.50-0.90%. On the spread front, experts continue to believe that there is room for a further decline in the 75bp area in the wake of the expectation of a further increase in excess liquidity.
The interest of bonds linked to inflation
The short-term part of the Italian curve currently has little room for further decline in terms of nominal interest rates, being now close to the level of the ECB deposit rate. Only a possible rate cut by the ECBexperts say it could give a further boost, but that hypothesis is not part of their baseline scenario. In this context, the linker component linked to eurozone inflation could be an interesting tool, especially on the short-term part of the BTP € i curve.
It should be remembered that in the second quarter the average monthly purchases of the PEPP plan will be more substantial, settling at around € 80 billion per month (according to a rumor the ECB intends to purchase between € 60-100 billion per month).
All this while the vaccination campaign is proceeding with a foreseeable delay, accumulated by the European Union compared to the Anglo-Saxon countries, which determines different perspectives in terms of the reopening of the economies in the second quarter of 2021 and a different monetary policy attitude. The consequence, the experts conclude, is that we thus have Central banks that worry about rising yields (ECB) and those that are comfortable (Fed and BoE).
E i Treasury?
Looking overseas, the Fed has promised it will not “take away the liquor cart” and the party can continue. “The trend during the 2nd quarter of 10-year Treasury rate is to area 2% (1.94% technically speaking). The improvement of the macro picture thanks to the advancement of the vaccination campaign, the Biden plan equal to 9% of GDP, rapidly accelerating inflation and supply pressures (the Treasury should make net emissions of $ 500 billion in Q2) are among the main factors that should keep upward pressures on US rates high in the medium to long term ”, argues MPS Capital Services, which nevertheless believes that the next is the last leg of the rise.
This is for three reasons: 1) a hike above should have strongly negative effects on other assets (eg equities) which would prompt the Fed to intervene (Powell stated that movements
Market turbulence would be a cause for concern); 2) Treasuries at current levels are increasingly attractive to foreign investors (eg Japanese investors) whose demand should help to curb excessive rises; 3) the market, in the wake of the strong economic recovery and acceleration of inflation, could return to price a Fed to tend (at the end of the year) less accommodating (taper tantrum).