An announcement from Donald Trump was enough to calm the growth in yields on Italian government bonds. After the US president declared that US ships will escort civilian cargo in the Strait of Hormuz to defend them from Iranian attacks, the spread between BTPs and Bunds narrowed sharply at the opening on May 4, reaching 84 basis points.
The decline in the differential was determined by a reduction in yields, which moved away from the 4% threshold reached at the end of last week, before the break caused by the May Day holidays.
Trump’s Project Freedom calms the markets: BTP-Bund spread falling
The clear reduction in the spread between Italian BTPs and German Bunds depends mainly on a change in the outlook for the Middle East. Yesterday evening, May 3, US President Donald Trump announced Project Freedom, a plan to have US army ships escort all vessels from countries “not involved in the war” that wish to cross the Strait of Hormuz.
The promise is to resume maritime traffic in the region, protecting cargo from Iranian attacks. This was enough for the markets to stop the rise in yields on European government bonds. BTPs went from almost 4% on Thursday 30 April to 3.90% at the opening on 4 May, while Bunds returned to 3.06%. The result was a spread that went from 87 basis points to 84.
Yields are falling across Europe
The decline in yields was widespread across all large European countries. In Spain the Bonos returned to around 3.5%, to be precise at 3.53%, thus maintaining a spread with the German Bunds of 47 basis points, very similar to the one with which they concluded last week.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.06% | – |
| Italian BTPs | 3.90% | 84 |
| French Oats | 3.72% | 66 |
| Spanish bonos | 3.53% | 47 |
The French Oat followed the same trajectory, which went from 3.79% to 3.72% yield, with a differential with the German counterparts of 66 basis points, also in this case substantially stable.
The May auctions of BTPs and BOTs
The traditional BTP and BOT auctions for institutional investors will be held throughout the month of May. The dates set in the calendar are:
- May 12th, Bot auction;
- 13 May, auction of medium-long term BTPs;
- May 26, Short Term BTP auction:
- May 27th, Bot auction
- May 28, auction of medium-long term BTPs.
The April auctions ended with some mixed signals, including demand below 1.50 for CctEu and just above this threshold for BTPs maturing in 2031. The drop in yields is good news for the Treasury. The war in Iran is in fact leading to extra expenses on the debt compared to those hoped for at the beginning of the year, when the spread was around 60 basis points.
