The spread between Italian BTPs and German Bunds began to grow again, reaching 84 basis points on the morning of September 1st. Government bond yields made another leap, reaching 4.18% and therefore remaining at 2023 levels. Interest on 10-year BTPs had not reached these peaks for years.
A series of factors contribute to these increases. International instability and the energy crisis are putting European economies in difficulty, but the behavior of the Fed and Kevin Warsh’s words still considered too ambiguous are also contributing.
What’s happening to spreads and yields
In recent weeks, the yields on Italian government bonds have grown significantly and, after months at around 3.50%, have stabilized at well above 4%. On September 1, at the start, interest on ten-year BTPs reached 4.18%, a figure not seen since November 2023. The spread remains high but relatively stable at the same time, going from 83 points on Monday 31 August to 84 today.
What does the Fed have to do with Italian yields
One of the factors that is pushing European government bond yields so high is the behavior of the Federal Reserve, the US central bank. Inflation in the USA is very high and in July it exceeded 3.7%. A situation of this type should push the Fed and its president Kevin Warsh to increase interest rates on the dollar, to slow down the economy and curb the increase in prices.
Warsh, recently appointed by Trump, is however under pressure from the White House not to increase rates. On the contrary, Trump would like a reduction in rates, which would favor the stock market and investments, but would risk sending inflation to unacceptable levels. Between these two pressures, Warsh decided to stay put.
Even if in his speeches the Fed president shows himself ready to raise rates, the markets do not believe his rhetoric and think that he will not go against Trump’s wishes. This is also putting pressure on US public debt, with an increase in Treasury Bond yields. The result is that European securities must also raise their yields, so as not to succumb to American competition.
European government bonds suffer from Fed uncertainty
It is therefore no coincidence that all European government bonds are seeing their yields increase. Germany and Spain are actually going hand in hand, with the Bonos remaining constant at 45 points behind the Bund.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.34% | – |
| Italian BTPs | 4.18% | 84 |
| French Oats | 4.20% | 86 |
| Spanish bonos | 3.79% | 45 |
On the other hand, the French Oat fluctuate more, which are also influenced by the uncertainty of the next presidential elections and the weight of the country’s increasingly high public debt. The spread with Bunds in this case is 86 basis points.
The next auctions of Italian government bonds
However, the Treasury still has time before having to issue the next government bonds. In fact, there will be no auctions until the second week of September. The dates to note are:
- September 9th for the Bot auction;
- September 10 for the auction of medium and long-term bonds;
- on 24 September for the auction of Btp Short and Btp€i;
- September 25th for the Bot auction;
- on 26 September for the auction of medium and long-term bonds.
