Can Italy’s Bond Resilience Endure the Changing Rate Landscape?
8 JUL, 2025
By Mauro Valle from Generali Investments
Mauro Valle, Head of Fixed Income at Generali Asset Management (part of Generali Investments)
The recent narrowing of the BTP-Bund spread to 100 basis points – a level not seen since September 2021 – was driven by a number of positive factors. Italian economic growth in recent years has been strong, exceeding the euro area average, which has helped to stabilise the debt-to-GDP ratio. This has been helped by a budgetary policy that has kept public expenditure under control. Italy's deficit for 2024 was better than expected at 3.4%, with a slight improvement forecast for 2025. This development has been recognized by rating agencies, as evidenced by the recent upgrade of Italy's sovereign rating to BBB+ by S&P.
The 100 basis point mark is an important technical threshold, and over the past decade, BTPs have failed to consolidate below it. The possibility of spreads remaining at or below this level will depend on two key conditions: on the one hand, the maintenance of positive economic momentum and disciplined fiscal policy, and, on the other, a global context of stable or falling interest rates. Another important element is the change in fiscal dynamics in the eurozone. Public spending is increasing in several countries, not only in France, but also in Germany, which has announced investments in defense and infrastructure. This fiscal convergence helps to reduce the risk of sovereign rate divergence by providing support to peripheral bonds.
Although the current Italian spreads are less attractive from a historical point of view, we believe that they are sustainable and that the good performance of BTPs can continue in the medium to long term. A spread below 100 basis points is not in itself a reason to reduce exposure. The main risk lies in market volatility, as seen in April, when Trump's announcement of new tariffs pushed the spread to 130 basis points. Fundamentally, BTPs remain supported, although volatility may warrant some adjustment of spread positions.
For the Bunds, modest growth and inflation close to the ECB's 2% target should allow for further rate cuts. Yields above 2.5% offer opportunities for moderate interest rate exposure. By contrast, the Federal Reserve remains cautious and sees 10-year Treasury yields as neutral at around 4.5%, unless the labor market weakens.
