Sharp decline in the spread between BTPs and Bunds opening on November 4th. With the results of the midterm elections in the United States resulting in a resounding defeat for Donald Trump’s Republican Party, the pressure on European government bonds suddenly eased.
This despite several analysts fearing that the US president may return to attacking Iran soon. From January he will have a hostile Congress and therefore the next two months could be the last opportunity to end the war in the Middle East with some tangible results.
Spread down to 112 basis points after midterms
The markets are favorably evaluating the effect of the American midterm elections on European public debts. Not only did the spread between BTPs and Bunds fall to 112 basis points, but yields also fell, with Italian 10-year bonds listed at 4.43%. This is the sharpest reduction in recent weeks. It may seem obvious, given the difficulties that European economies encountered during the first two years of Trump’s second term, but it was less obvious than one might imagine.
Because Trump’s defeat in the midterms could create problems for government bonds
Several times in recent weeks, the US president has declared that, after the elections, he would take the issue of Iran back into his own hands. The day before the vote, US drones attacked Iranian positions in the Strait of Hormuz. A resumption of conflict in the Middle East, therefore, is realistic.
This would increase the price of oil, inflation and consequently, in all likelihood, interest rates. The result would be another slowdown in European economies and greater pressure on public debts, with deleterious effects on government bonds.
The opening of other spreads in Europe
Optimism characterized the opening of all European government bond markets, starting with Spain. The Bonos returned, after several weeks, to less than 60 basis points of spread, and the yields fell below 3.90%.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.31% | – |
| Italian BTPs | 4.43% | 112 |
| French Oats | 4.93% | 162 |
| Spanish bonos | 3.89% | 58 |
France is more in difficulty, although it limits the OAT spread to 162 basis points and further distances yields from the 5% mark.
The next auctions of Italian government bonds
The next auctions of Italian government bonds will be held after November 10th and will continue until the end of the month. The dates to mark on the calendar are:
- November 11th for the Bot auction;
- November 12 for the auction of medium and long-term bonds;
- November 25th for the auction of Short Term BTPs and BTP€i;
- November 26th for the second Bots auction;
- November 27 for the second auction of medium and long-term bonds.
