The Fed’s decision to raise interest rates has changed the European government bond market. The spread between Italian BTPs and German Bunds fell by two points after days of increases, reaching 87 basis points. Benchmark ten-year BTP yields suffered a sudden reduction, reaching 4.37%.
Throughout the first weeks of September, European government bonds found themselves having to compete with US Treasury Bonds, which were increasing in yield due to the Fed’s hesitations on interest rates. The situation now seems to have changed.
Spreads and yields are falling again
In the first hours of the opening of the financial markets on 17 September, the spread between Italian BTPs and German Bunds began to fall again, reaching 87 points. This is still a rather high share, but the differential has reversed course compared to recent days, moving away from the psychological threshold of 90 basis points, exceeded only once in 2026.
Government bond yields also decreased, returning below 4.40% to 4.37%. This figure had been on the rise for several weeks, due to a series of international circumstances that were putting the Italian economy in difficulty and making government bonds less attractive for investors.
The Fed calmed the markets
One of these factors, which affected all European securities, was the yields on Treasury Bonds. Historically stable, these securities had reached returns of 5% for the duration of 10 years. Since these are the government bonds of the world’s largest economy, BTPs, Bunds, Bonos and OATs found themselves having to raise yields in order to compete.
One of the factors that had pushed Treasury yields so high was the attitude of the Fed. All the US economic data, but above all the inflation above 3%, indicated the need for an increase in interest rates. However, the US central bank, led by Kevin Warsh, appointed by Trump, persisted in keeping them still.
This was worrying the markets, which feared that the new governor was influenced by the White House, which was firmly opposed to any restrictive monetary policy. Yesterday, however, Warsh announced a unanimous decision by the board of governors to raise interest rates on the dollar, calming the markets and bringing the Treasury yield back below 5%.
Stable European spreads
The effects of the Fed’s decision were also felt in the rest of Europe. In Spain the Bonos returned to 46 basis points from the Bunds, with yields of 3.96%.
| Government bonds | Returns | Spreads |
|---|---|---|
| German Bunds | 3.50% | – |
| Italian BTPs | 4.37% | 87 |
| French Oats | 4.47% | 97 |
| Spanish bonos | 3.96% | 46 |
The French Oats, on the other hand, remained stable at 97 basis points from their German counterparts, stopping a growth in the differential that had lasted for days.
The next auctions of government bonds
The drop in yields gives breathing space to the Treasury, which for months has had to deal with significantly higher-than-expected yields. The hope for state coffers is that this decline will continue until the next issues, which will be held:
- on 24 September, with the auction of Btp Short and Btp€i;
- September 25th, with the Bots auction;
- on September 26, with the auction of medium and long-term bonds.
