Italy at risk
The reason why economists and managers have a negative view on Italian government bonds is always the same: public debt, which if compared to GDP, is among the highest in the world. However, the movements in yields in recent months can be attributed to the ECB’s interest rate policy. “The yields of all government bonds in the area tripled on average in the second half of 2022. Obviously, Italy remains the subject most under attention: we must consider that the yields of BTPs have returned to the levels of 2012, when the debt/GDP was around 120%, while today it is equal to 150%” explains to We Wealth Edoardo Fusco Femiano, founder of DLD Capital Scf, who underlines that there is an issue of sustainability of the Italian debt, above all in a context of rising interest rates and decelerating economic growth. “Although the ESM and the PNRR have effectively created a European framework for consolidating sovereign debt, it is a fact that, perhaps not immediately, governments and central bankers will have to address the problem of a cost of debt at structurally higher levels than in the last decade continues Fusco Femiano.
The anti-spread shield
If there were to be an effective sell-off of Italian government bonds in the coming months, especially if dictated by speculative reasons, the ECB is ready to deploy the Transmission Protection Instrument, the anti-spread shield designed to protect investors and countries from dynamics of unjustified and disorderly market, through the purchase of government bonds on the secondary market. Is it a tool that can reassure investors? “The anti-spread shield today is a more complex measure to implement than in 2011: at the 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 fight the rise in prices: the question that no investor can answer is how long they will hold such a position, especially when the need to support liquidity arises general of the system” continues Fusco Femiano.
Is it worth investing in BTPs?
In any case, BTPs have returned to paying attractive yields, with the 10-year offering 4.27%. Is it worth investing at these prices? Yes, but bearing in mind that any investor position must take place within the investment time horizon. “Considering the correction we are witnessing on the bond market, the recommendation can only be to position ourselves on short or intermediate maturities, around 5 years, always respecting the investor’s time horizons. Despite yields structurally higher than the average of the last ten years, there is volatility across the entire yield curve and, if one is not willing to hold securities to maturity, one is inevitably exposed to that volatility” concludes Fusco Femiano..