Heightening tensions in the Middle East have destabilized European government bond markets. The spread between Italian BTPs and German Bunds grew by three basis points in one day, reaching 85 points, but it is above all the yields that stand out. Ten-year BTPs, driven by the price of oil, reached 4.27%.
Bots have also been affected by this uncertain market trend. In yesterday’s auction, one-year zero-coupon bonds achieved a yield of 3%, among the highest in recent history. The auctions for medium and long-term securities will end today.
Spreads and returns are growing again
After almost a week of stability, with the spread at 82 basis points, the differential between the yields of Italian and German government bonds began to grow again. Three points more, 85 basis points, and average interest of 4.27% on ten-year BTPs, the benchmarks for calculating this metric.
The Middle East scares the markets
The reason for these spikes appears to be the escalation in the Middle East. The United States and Iran are attacking each other, with attacks on oil tankers and infrastructure becoming increasingly frequent. Donald Trump’s statements didn’t help. In fact, the US president said:
The war won’t end before the midterm elections.
Until at least the beginning of November, therefore, there will continue to be clashes in the Strait of Hormuz region. These tensions brought the price of Brent above 100 dollars a barrel yesterday.
The highest yields since the last energy crisis
The markets’ concern is that the crisis in the Middle East will translate into an out-of-control increase in the cost of energy in Europe. This would lead to an increase in inflation and a higher possibility of an increase in interest rates on deposits by the ECB. In turn, the growth in the cost of money would slow down the economy, compromising the public debt situation of European countries.
This is the same mechanism that led to the latest spike in yields similar to today’s. It was the autumn of 2023, almost exactly three years ago, when BTPs last reached a 4.27% yield. At the time, however, they were on a downward trajectory, returning to normal values after the energy crisis caused by the Russian invasion of Ukraine.
BOT yields almost at 3%, today the auction of medium and long-term BTPs
The market trend was reflected in yesterday’s BOT auction. Short-term securities came close to an annual yield of 3%, two tenths higher than the last auction with similar products. The auction for medium and long-term bonds will be held today, with issues of:
- 3-year BTPs expiring in September 2029 for 3.5 billion euros, with an annual coupon of 3%;
- 7-year BTPs expiring in September 2033, worth 3.5 billion euros, with an annual coupon of 3.35%.
- 50-year BTPs expiring in March 2072, 750 million euros, with an annual coupon of 2.15%.
The next auctions will be held:
- on 24 September, the auction of Btp Short and Btp€i;
- September 25th, the Bots auction;
- on 26 September, the auction of medium and long-term bonds.
The spread is growing across Europe
Yields on Spanish Bonos also increased, albeit only by one basis point. Yields closely followed the trend of Bund yields and reached 3.87%.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.42% | – |
| Italian BTPs | 4.27% | 85 |
| French Oats | 4.32% | 90 |
| Spanish bonos | 3.87% | 45 |
A net worsening on the other hand for the French spread, which remains the highest of the major European countries. Oats are 90 basis points away from Bunds, with yields of 4.32%.
