The spread is at its lowest in years, but it's not all good news

A spread like this has not been seen since January 2022. The spread between Italian and German government bonds has fallen to 130 points. An advantage for Italian investors and for stocks, but there are also aspects that cannot allow us to slip into an exclusive climate of euphoria.

There are governments that have been put at risk of falling due to the spread, which has always loomed over Italian (and European) executives. Now the spread between BTPs and Bunds, after over 200 points a few months ago, has returned to levels not seen for years. Italy's 10-year yield fell seven points to 3.56%. Why? The first reason is the words (yesterday) of Christine Lagarde, president of the ECB, who took another pause in monetary policy, however giving hope for a rate cut in June. Then there is the great liquidity on the markets and the recession in Germany. And there is general market confidence that the sovereign debt crisis is on the decline, as demonstrated by the fact that the spread has been falling in many other European countries since the beginning of the year.

A low spread is advantageous for Italy for several reasons. First, there is the political aspect. It is a demonstration of the trust of citizens and financial markets in the government. Then there are the advantages for savers who invest in Italian securities with a more generous profit with the falling spread. In fact, for every point less in yield on a ten-year fixed rate bond, the capital value of the bond increases by seven points. The third advantage concerns the stock market. If with government bonds the saver, with practically zero risk, has a return of 4%, then it is obvious that if he invests in the stock market he wants the profit to be at least 8%, given that he assumes the risk. Thus, as the spread decreases, stocks are bought to a greater extent and at higher prices. Finally, there is the Treasury which certainly saves money by placing government bonds with a lower spread, but, on the other hand, must continue to pay a still high average cost of debt financing, 3.62% in February.

So is everyone happy? There are two aspects that deserve a “secular approach” to the good news of a spread that is no longer scary. First of all, all the other countries in the euro area are also experiencing a period of decline in the spread: 6 points for France, 11 for Spain, 10 for Portugal. And in this context the Italian decline, even if very strong (from 200 to 130 yesterday, 131 today as we write) still sees the BTP with a premium of at least half a point of additional yield compared to the securities of some of the other countries in comparison to the official parameter, the German Bund. Then there is the Germany question. The German recession plays a big role in the decline of the spread, adding to the Italian merits. But celebrating the economic crisis of our neighbor because it helps us maintain a decreasing spread means being happy with the difficulties of one of our most important partners for exports and trade. In short, economically speaking, the low spread is better for Rome, but it is also better for Berlin to emerge from the negative trend of recent months.