The BTP-Bund spread in today’s session, Tuesday 18 August, opened at around 80 basis points.
The spread between 10-year Italian and German government bonds started trading at 80.2 basis points, compared to 79.5 points at the previous close. During the morning the value remained mostly constant, according to data from the Italian Stock Exchange.
What happens to the Spread
The yield on the 10-year BTP remains at 4.04%. These are numbers that are of interest not only to financial operators, but also to savers who own BTPs or other government bonds or who want to understand what is happening to the Italian bond market.
The BTP-Bund spread measures the difference between the yield of the 10-year Italian BTP and that of the German Bund with the same maturity. Its performance is observed because it reflects investors’ assessments of the risk associated with the two securities and, more generally, of the Italian public debt compared to the German benchmark.
The opening of the spread on 17 August instead settled at 77 points.
BTP at 4.04%
For those who are considering the purchase of a government bond, the spread is not the only number to look at: the most important data is the yield of the BTP, which today is around 4.04%. The yield indicates how much the market requires to hold that security, considering the price at which it is traded and the expected flows until maturity. But be careful: yield and coupon are different things. The coupon is the interest provided by the terms of the bond. The market return, however, also varies depending on the price at which the BTP is purchased. For this reason, an already issued BTP can continue to pay exactly the same coupon originally envisaged even when the spread changes significantly.
The spread is a market indicator and not a mechanism that directly modifies the contractual conditions of an already purchased BTP. What may change instead is the price of the security on the secondary market. If market yields rise, the prices of bonds already in circulation tend to fall; if yields fall, prices tend to rise instead.
Variable coupon BTPs
Let’s now see what happens to those who have purchased a BTP with a variable coupon: also in this case we must look at the specific conditions of the security. The change in the BTP-Bund spread does not automatically determine a change in the coupon and any adjustment depends on the characteristics of the issue and the indexation mechanism.
80 point spread: is it high or low?
At this point we will ask ourselves whether an 80 point spread is high or low. In January the spread managed to fall below 60 basis points, while in March it rose above 90. Today it is therefore in a substantially intermediate position. Italian stock exchange indicates a minimum of 55.19 basis points and a maximum of 104.94 for the year. The current value must therefore be read as a physiological oscillation. In other words, the spread at 80 signals a new equilibrium in which the market attributes a moderate but constant premium to the Italian risk. In short, the markets trust Italy but do not forget the critical issues on the table, starting from the immense public debt and poor growth.
