The opening on Wednesday 15 July confirmed the return of the anomaly recorded 24 hours earlier on the European government bond markets. The Italian spread, and that of the other most important Eurozone countries, has returned to the levels of recent weeks after a completely unexpected peak.
Yields, however, remained at very high levels compared to the recent past. The reduction in the differential is therefore due to a significant growth in interest on German bonds, which have now steadily exceeded the 3.10% mark, reaching 3.14% in the morning.
Spread, the anomaly disappears but the returns remain high
After yesterday’s peak, the spread has returned. From 81 to 73 basis points, following a trend already shown in the last 24 hours. The opening on July 14th proved to be an anomaly, both for Italy and for the other large European countries. However, yields did not decrease, remaining significantly higher than in the past.
From 3.92% in the early hours of yesterday, BTPs fell to 3.87%. The rest of the decline in the spread comes from an increase in interest on German government bonds, which reached 3.14%. Tracing this behavior back to the crisis in the Middle East, July 14 showed the old Bund dynamic.
In the past, in fact, German debt was seen as a safe haven asset. When the economy or international politics showed signs of instability, investors moved their funds towards Bunds, to the detriment of other government bonds. This widened the spread in two directions, limiting interest on Berlin’s bonds and exacerbating the others. Now, however, this trend has disappeared: Bunds roughly follow the trend of all other European securities.
The other European spreads are also within normal range
After the peak close to 50 basis points, the Bonos recorded a clear decline of 9 points, bringing the spread back to 40. A share not only in line with that of recent weeks, but also lower than the average of this phase. Yields stabilized at 3.54%, still high in this case too.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.14% | – |
| Italian BTPs | 3.87% | 73 |
| French Oats | 3.89% | 75 |
| Spanish bonos | 3.54% | 40 |
French OATs also returned to more usual spreads and yields. However, the differential remains higher than the Italian one, at 75 basis points, with yields close to 3.90%. The markets see a phase of political instability approaching towards the presidential elections, with a high probability that an extremist group, right or left, will win.
The next auctions of government bonds
While yields remain high, new government bond auctions are approaching. At the end of the month, BOTs, medium and long-term securities and short-term BTPs will be issued. The dates to note are:
- 28 July auction of Short Term BTPs and BTP€i;
- July 29th Bot auction;
- July 30 auction of medium and long-term bonds.
