The ECB of German Isabel Schnabel praised Italy today for the trend in the BTP-Bund spread which, despite the series of rate increases that the European Central Bank launched almost incessantly in 2022 and 2023, not only remained under control but he pointed decisively downwards.
Thanks to whom?
On the one hand, the hawkish exponent of the ECB – already in the spotlight with his constant attention, even now, to Eurozone inflation – recognized the merits of the policies launched by the Meloni government. On the other hand, Schnabel claimed it though the merit of the ECB, especially that one shield saves BTP anti-spread which the number one of the central bank, Christine Lagarde, launched in July 2022, baptizing it TPI ((instrument for the protection of the monetary policy transmission mechanism, i.e. Transmission Protection Instrument).
In the meantime, watch out trend of the 10-year BTP-Bund spread, which continues to shrink. Today the spread has fallen to 145 basis points, compared to ten-year BTP rates retreating to 3.86%.
Further improvements, he wrote Mauro Valle, Head of Fixed Income at Generali Asset Management in a note, cannot be excluded.
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ECB, German Schnabel compliments the BTP-Bund spread
Highlighted today are the statements that the German member of the Executive Committee of the ECB Isabel Schnabel he released speaking from Milan, on the occasion of a speech at Bocconi University with a lecture entitled ‘Has the fight against inflation been won?’.
Schnabel commented the strong about-face of the BTP-Bund spreaddefining the “very, very low” differential:
something significant, he remarked, especially considering the fact that the European Central Bank launched the “steepest rate hike cycle” in history.
For the member of the Executive Committee of the ECB, the downward trend in the BTP-Bund spread was supported on the one hand by the “Italian national policies” launched by the Meloni government but, on the other side, also from the anti-spread shield saves BTP TPI (which in reality, since the moment of its birth, has been viewed with a certain distrust by experts).
According to what was reported by Ansa, Schnabel he also spoke about the Italian public debt, defining the debt-to-GDP ratio of the country again “relatively high”.
It is therefore desirable, he added, “turn it down.”
At the same time, the economist emphasized that “what we have learned is that fiscal consolidation alone is not enough if there is no growth”.
Precisely “long-term growth” was identified by Schnabel as one of the greatest challenges not only for Italy but for the “entire euro area”.
Spread now a source of pride for the Meloni government
There is no doubt about the fact that the compliment that came from Germany from Isabel Schnabel represents another point in favor of the Meloni government.
Many times the Prime Minister Giorgia Meloni proudly flaunted the downward trend in the differential between the rates of 10-year BTPs and those of Bunds with the same maturity.
At the end of November, the prime minister responded to the senator and leader of Italia Viva Matteo Renzi with the following words:
“With all due respect, please note that I’m not the one saying that. I think it is clear to everyone how the confidence, for example, of investors and markets in the Italian economy has grown in recent months. With all due respect, I think that the promotion of four rating agencies that are usually not ‘good’, so to speak, on these matters and the fact that families very willingly buy our government bonds, that the spread is at its lowest level for a long time and that the Italian stock exchange is growing more than all the other European stock exchanges are data that say something more than the assessments – legitimate, obviously – of the opposition”.
Said this, Isabel Schnabel’s ECB took part of the credit for the decline in the spread, citing that shield TPI which in reality, up to now, has never been used.
The reference is to that instrument that made its appearance in the arsenal of the European Central Bank in July 2022, ironically the same day the Draghi government fell in Italy.
Several market experts had However, the ICTY was immediately rejected, stating that, in the case of Italy, it could not even have been used.
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Evidently for Isabel Schnabel the mere presence of this blunt weapon was instead capable of keep BTP rates and the trend of the BTP-Bund spread under control.
That said, to what extent Can the Italy-Germany spread fall further? And what are the prospects for Italian paper?
From Generali Investments confidence in the spread and in peripheral government bonds
Focus on analysis “European government bonds: positive returns in 2024, optimism on peripheral countries” signed by Mauro Valle, Head of Fixed Income at Generali Asset Management.
Valle reiterated his confidence, in general, in government bonds from the periphery of the Eurozone, pointing out the U-turn of the spread on the 10-year BTP-Bund, which fluctuates at the lowest level of the last two years, while Spanish spreads have reached close to 90bps.
This is not to say that the situation is not improving, on the contrary.
In his opinion, in fact, “spreads could continue to perform well thanks to various factors, including the positive attitude of rating agencies, higher-than-expected GDP growth and expectations that future fiscal debts will be limited by the EU Stability and Growth Pact”.
The outlook is therefore positive:
“We therefore confirm our positive position on peripheral bonds, with respect to which we are overweight compared to the benchmark”.
Among other things, with inflation in the euro area falling below 3% in December, apparently “destined to reach the 2% zone by the end of the year, a much lower level than the latest forecasts made by the ECB” Valle he underlined that, despite the caution expressed by central bankers to cut rates “to avoid generating excessive market movements and keeping inflation expectations anchored, the underlying trend suggests a shift towards a more accommodative orientation of monetary policy”.
Furthermore, “The ECB’s macro forecasts are slightly optimistic and they expect inflation to be a little too high considering the weakness of the EU”, an element which “could provide further support to an accommodating political orientation from the ECB in the coming months.”
How?
“Il consensus is that the ECB will start cutting rates at the beginning of the summer, as mentioned by Lagarde in recent days in Davos, but the real question is how deep this cycle of cuts will be. At the moment the market sentiment leans towards a first rate cut by the ECB in June, with four cuts expected by October“.
In this context, Mauro Valle pointed out that “Eurozone core rates, after the downward movement observed in the last two months of 2023, when they reached the 1.90% area from a peak of 3%, they rebounded to 2.35%,” adding that this could be “a first entry level to increase the duration of walletsalthough it is believed that they may remain within a range for a few more months, awaiting further confirmation of the macroeconomic scenario and the decline in inflation”.
Meanwhile, “the euro yield curve is still clearly inverted,” with “the German 2-year BTP-Bund which offers a yield almost 40 basis points higher than the 10-year rate”.
“But when the central bank signals its concrete intention to cut rates, the yield curve should steepen, with a widening of the 2-10 year spread in the Eurozone and a probable outperformance of medium-short term securities. At the same time, Starting to increase the duration of your bond portfolio could prove to be a useful diversification strategy in the event of a risk-averse or increased volatility environment“.
Precisely in consideration of these perspectives, Valle stated that, in his opinion, “Investors should take advantage of current rate levels to optimize portfolio returns.”
In reiterating the positive view on peripheral bonds, Valle also indicated that “the main risk is the high net issuance expected in the coming weeks” of government bonds.
However, confidence in the “strong demand” for government bonds from the periphery of the Eurozone was confirmed, a factor which should prevent the growth in supply from having “significant impact on spreads for now”, on the back of “investor appetite for carry and yield,” moving forward.
In summary – concluded the Head of Fixed Income at Generali Asset Management – given the favorable prospects, we believe that investors they should take advantage of the current high interest rates to optimize returns ahead of rate cuts, while adding duration for diversification in the event of a risk-averse or increased volatility environment.”