The spread between BTPs and German Bunds continues to decline. After the positive opinion of Moody’s, which raised Italy’s rating for the first time in more than two decades, the differential between our country’s government bonds and those of Germany initially returned to 75 basis points, before rising slightly again.
Despite this, yields continue to be relatively high, thanks above all to interest rates that are still far from pre-pandemic levels. In this context, the Bank of Italy has also certified the safety of the Italian public debt
The consequences of the low spread
The spread between BTPs and German Bunds continues to remain around 75 basis points. A sign of stability for Italy, which received an important promotion from the rating agency Moody’s. On Friday 21 November the rating on our country’s public debt went from Baa3 to Baa2 23 years after the last positive change. A result resulting above all from the attention to the public accounts of the latest financial maneuvers, which brought Italy back within the threshold of 3% of the deficit/GDP ratio.
These assessments are fundamental for our country, because they reassure investors about the state’s ability to repay its debt. This causes BTP yields to drop, thus reducing interest expenditure on the debt, which is the first expenditure item in the state budget. In this way, Italy can start a process of reducing the cost of debt which frees up resources for interventions on the economy.
The advantages for investors
Although the spread is very low, the yields on Italian government bonds should not be underestimated. The benchmark 10-year BTP yields around 3.45%. A figure to which the cost of money contributes, which has remained high despite the cuts in reference interest rates made by the ECB in recent months. The spread, which is so low despite the yields, is also justified by Germany’s economic difficulties, which have led to slightly higher interest rates on Bunds than in the past.
For investors, this combination is very attractive. On the one hand, returns remain relatively high. On the other hand, rating agencies certify that the risk of buying parts of Italian debt is becoming increasingly lower, making the possibility of not receiving your investment back increasingly remote.
The opinion of Bank of Italy
Even the Bank of Italy, in its recent report on financial stability, highlighted how Italian debt has fundamentally overcome a critical phase that began in 2008:
The yield differential between Italian and German ten-year government bonds has narrowed further, reaching values in line with those observed before the sovereign debt crisis of the last decade. The stability of the macrofinancial framework benefits from the moderate recovery of credit, the stability of labor income, low unemployment, the prudent approach of budget policy, the limited private debt and the net foreign credit position.
