The spread between Italian BTPs and German Bunds opened the week in line with the close of Friday 2 October at 120 basis points, down from the peaks of almost 130 last week. Italian bonds have reported returns far from the 2023 highs, but the levels remain among the highest in the last 13 years.
The release of diesel reserves only partially calmed the bond market. In fact, US Treasury bonds closed last week above the 5.25% yield level, considered the limit before the interest on US government bonds begins to impact the stock market trend in a negative way.
The spread is still high, despite the diesel decision
The expectation for a turning point in the bond market did not prove to be well founded. Despite the open-minded decision by the G7 European states to release diesel and oil reserves in order to reduce diesel prices, long-term fears about inflation and stability in the Middle East continue to drive capital away from government bonds.
The spread between BTPs and Bunds has narrowed due to a rather substantial drop in BTP yields, which however remain at 4.63%, one of the highest levels of the last 13 years. This signals a lack of confidence on the part of investors, also dictated by the fact that T-Bonds closed above the psychological threshold of 5.25% last week.
How much is this spread costing Italy
Government bond yields could soon become a problem for the government. In fact, in 2027, some of the bonds issued just before 2021 will expire, when interest rates were at zero and BTP coupons below 1%. Today a 10-year BTP is at 4.63%.
According to data from the Ministry of Economy itself, recently released in the public finance policy document, this could lead to a sudden increase in the cost of interest on debt:
- in 2025 Italy paid 87.2 billion euros in interest on the debt;
- in 2026 Italy will pay a total of 96.2 billion euros in interest on the debt;
- in 2027 Italy will pay 103.7 billion euros in interest on the debt;
- in 2028 Italy will pay 112.3 billion euros in interest on the debt.
Almost 25 billion euros more in four years, a financial maneuver. It should be emphasized that these are not funds dedicated to repaying the debt, but only to paying the interest. To these expenses must be added the much larger costs of paying BOTs, BTPs and CCTs as they expire.
The spread also scares the rest of Europe
However, the debt problem is not just Italian. The international bond markets are in turmoil, sending almost all European securities into crisis. Spain, stable for months at around a 40 point spread, saw the Bonos jump to 64 basis points from the Bund, also thanks to the announcement of early elections given by Prime Minister Sanchez.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.43% | – |
| Italian BTPs | 4.63% | 120 |
| French Oats | 4.90% | 147 |
| Spanish bonos | 4.08% | 65 |
France continues to replace Italy as the state with the most worrying debt situation. The Government has just proposed a financial package of 40 billion in spending cuts just to bring the deficit below 5%. The result is a spread that is close to 150 basis points.
The next auctions of government bonds
Regular auctions of Italian government bonds will resume at the end of this week. The dates to note are:
- Friday 9 October for the Bot auction;
- Tuesday 13 October for the auction of medium and long-term bonds;
- Tuesday 27 October for the auction of Short Term BTPs and BTP€i;
- Wednesday 28 October for the Bots auction;
- Thursday 29 October for the auction of medium and long-term bonds.
The Treasury will also issue, between 19 and 23 October, a new tranche of BTP Valore.
