After yesterday’s sharp decline, the spread between Italian BTPs and German Bunds began to grow again during the first minutes after the opening on November 11th. The differential has risen to 105 basis points, but it is the yields that stand out, going from 4.27% yesterday morning to 4.35%.
This is not just the consequence of the end of the decline in the price of oil, which seems to have stabilized at 86 dollars a barrel. Yesterday the US recorded higher-than-expected inflation and this could have a knock-on effect on US and European government bonds.
Because spreads and yields have started to grow again
Yesterday seemed to portend a return of the spread and above all of the yields of government bonds to normal. The drop in oil prices, which fell by more than 20% in 10 days, seemed like the right push to bring these metrics closer to the average of recent years and away from the October peaks.
However, the opening on November 11th went against the trend. The spread increased three points from the previous day, to 105 basis points, while yields rose eight cents, to 4.35%. It was enough for the US to publish negative inflation data to once again destabilize the government bond market.
Why US inflation affects European spreads
Yesterday the US published data on inflation for October, which grew by 0.4% compared to September. More than expected, although less than the 0.6% of the previous month. This could cause a cascade effect with consequences for Italian government bonds:
- higher inflation increases the likelihood that the Fed will raise interest rates;
- higher rates mean higher yields on US government bonds;
- European securities must compete with US ones on international markets;
- interest on European government bonds increases.
The effect of US inflation on other European countries
Spain and France are also suffering the consequences of this negative data. The Bonos returned to a spread of 56 basis points, with yields at 3.87%.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.31% | – |
| Italian BTPs | 4.36% | 105 |
| French Oats | 4.78% | 147 |
| Spanish bonos | 3.87% | 56 |
The Oat spread reached 147 basis points, with yields of 4.78%, still high but far from the October peaks.
The BOT auction will be held today, and the medium and long-term securities auction tomorrow
The auction for 8.5 billion euros in 12-month BOTs will end today. These securities do not have a coupon and their returns are determined only by the difference between the selling price and the nominal price. However, the medium and long-term bonds that will be auctioned tomorrow, November 12th, have a coupon:
- a 3-year BTP, ISIN code IT0005716839, with an annual coupon of 3%;
- a 7-year BTP, ISIN code IT0005722845, with an annual coupon of 3.35%;
- a 20-year Green BTP, Isin code IT0005631608, with an annual coupon of 4.10%.
The next government bond auctions will be at the end of the month. The calendar reads:
- November 25th the auction of Short Term BTPs and BTP€i;
- November 26th the second Bots auction;
- November 27th the second auction of medium and long-term bonds.
