Economists say Italy is the eurozone country most exposed to a debt crisis when the European Central Bank raises interest rates and buys fewer bonds in the coming months. Nine out of 10 economists in a Financial Times poll listed Italy as the eurozone country “most at risk of a sell-off in government bond markets.” Only five months ago, the same British newspaper reported speculative maneuvers by hedge funds against Italy with estimated volumes equal to those of the 2008 financial crisis. Can we expect spreads to increase in the coming months?
Italy at risk
The reason economists and managers have a negative view of Italian government bonds is always the same: the public debt, which, compared to GDP, is among the highest in the world. However, yield movements in recent months can be attributed to the ECB’s rate policy. “The yields of all government bonds in the area have, on average, tripled in the second half of 2022. Italy remains the subject most under attention: we have to consider that BTP yields are back to the levels of 2012, when debt/GDP was around 120 percent, while today it is 150 percent,” Edoardo Fusco Femiano, founder of DLD Capital Scf, explains to We Wealth, who points out that there is an issue of sustainability of Italian debt, especially in a context of rising interest rates and decelerating economic growth. “Although ESM and NRP have created a European framework for consolidating sovereign debt, it is a given that, perhaps not immediately, rulers and central bankers will have to pose the problem of a cost of debt at structurally higher levels than in the last decade,” continues Fusco Femiano.
The anti-spread shield
Should there be an actual sell-off of Italian government bonds in the coming months, especially if speculative reasons dictate it, the ECB is ready to put the Transmission Protection Instrument, the anti-spread shield designed to protect investors and countries from unjustified and disorderly market dynamics, through the secondary market purchase of government bonds. Is it an instrument that can reassure investors? “The anti-spread shield today is a more complex measure to implement than in 2011: at that time, we were in deflation and, an element not to be underestimated, the credibility of central banks was not at stake as it is today. The return of inflation has forced central banks to go back to draining liquidity to combat the rise in prices: the question no investor can answer is how long they will hold such a position, especially as the need to support the general liquidity of the system arises,” Fusco Femiano continues.
Is it worth investing in BTPs?
In any case, BTPs are back to paying attractive yields, with the 10-year offering at 4.27 percent. Is it worth investing in these prices? Remember that any investor position must be within the investment time horizon. “Considering the correction we are witnessing in the bond market, the recommendation can only be to position on short or intermediate maturities, around five years, always respecting the investor’s time horizons. Despite structurally higher than average yields over the past decade, there is volatility across the yield curve, and if you are not willing to hold bonds to maturity, you are inevitably exposed to that volatility,” Fusco Femiano concludes.
