Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Italian BTPs will be 2020's European best performing sovereigns
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Italian and Greek sovereigns are outperforming their peers. We believe that as the ECB intensifies its accommodative measures, European government bonds will continue to benefit with long-term Italian BTPs gaining the most. The 10-year spread between BTP and the Bund will most likely fall below 90bps, while the 30-year BTP-Bund spread will trade around 100bps by year-end.
Italian and Greek sovereigns are outperforming their peers. We believe that as the ECB intensifies its accommodative measures, European government bonds will continue to benefit with long-term Italian BTP gaining the most. The 10-year spread between BTP and the Bund will most likely fall below 90bps, while the 30-year spread will trade around 100bps by year-end.
Coronavirus cases are rising everywhere in Europe, especially in Southern European countries. Yet, sovereigns from the periphery continue to rally, seemingly not caring of further lockdown measures that would inevitably deteriorate already weak economies, why?
The European Central Bank is flooding the European market with liquidity, and it is seriously considering to increase its accommodative measures in the next few months. The obsession of the ECB's to aid inflation by printing more money is creating a market distortion that will inevitably end badly. In the meanwhile, countries such as Portugal, Spain and Italy will continue to benefit from it, and they will take advantage of ever low rates by issuing more debt.
Italy and Greece have been so far the best European sovereign investments of the year
Assume you were purchasing €1,000 in 10-year BTPs (IT0005413171) at the beginning of the June at a price of 101, by now you would have already made around 8.5% from your initial investment.
That's not bad considering that you are buying into a European government bond with virtually no risk of default.
Even though over the past few years, Italian sovereigns have been in the news headlines because of political and economic distress, lately they hit the news because of their extreme appreciation. Yesterday, the Southern European country placed for the first time a bond with three year maturity offering a coupon of zero per cent.
Italy has not been alone in the rally, all European bonds have been steadily going up; however, Greece and Italy have arguably been benefitting the most from ECB's accommodative measures.
The rally will continue, and Italian 30-year BTP will benefit the most
As the ECB continues to increase market stimulus, we can expect the periphery to continue to rally regardless of the severity of the Covid-19 pandemic. It is evident that the European Union, together with the ECB, are doing everything possible to limit an economic shock and to ignite a recovery. Therefore amid a new Covid-19 wave, we can expect the ECB and the EU to continue to be supportive of the market, especially now that deflation is becoming a credible threat.
In this context, we believe that in the short-term, we will see European sovereign yield curves to flatten significantly. Long term maturities will fall faster as there is limited upside in the front part of the yield curve because yields are already close to zero per cent.
In order to visualize the relative value of long-term sovereigns in the periphery, we compare Italian, Spanish and Portuguese 30-year bond spreads versus German Bund. Because there is not a 30-year Greek sovereign bond available, we will not be able to compare Greece to the lot.
Also, we don't generally like Greek sovereigns as they are much more illiquid, making them extremely risky in times of high volatility.
The graph below speaks for itself: while Portuguese and Spanish 30-year sovereign spreads versus the Bund have tightened substantially, 30-year Italian BTPs look rich.
We believe that, until the end of the year, there is potential for the 30-year BTPs to rise further. The spread between Italian 30-year BTPs and the Bund can tighten below 120bps, reaching even 100bps.
The 10-year BTP is also pricing richer compared to its peers; however, we believe that there is a smaller upside. The spread between the BTP and Bund can fall below 100bps but then stabilize in the range of 90 to 80bps.
How can I get exposure to Italian BTPs in Saxo Bank?
Bonds:
You can select among a long list of Italian sovereigns bonds, the maturity you like the most.
Futures:
- Euro BTP 10 year: Ticker FBTP, and you can chose the contract expiry
- Short-Term Euro BTP: Ticker FBTS, and you can chose the contract expiry
CFD:
- 10YBTPDEC20
ETF:
- Lyxor EuroMTS 10Y Italy BTP Gov UCITS ETF (BTP10:xmil)
- Lyxor EuroMTS 1-3Y Italy BTP Govt UCITS ETF (BTP13:xmil)
- Lyxor UCITS ETF Daily Leveraged BTP (BTP2L:xmil)
- LYXOR UCITS ETF Daily Double Short BTP (BTP2S:xmil)
- Lyxor Daily Leveraged BTP UCITS ETF (BTPL:xpar)
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