Looking Through ESM Headlines, Bund Spread Consolidates Just Above Recent Tights

Early trade this week sees little net movement in the 10-Year BTP-Bund spread, which consolidates the recent tick away from cycle tights, back above the 160bp mark. A quick reminder that Bank of Italy Governor Visco has previously suggested that somewhere below 150bp would be a fair level for the spread.

• The BTP curve has twist steepened, with the 7- to 10-Year zone outperforming.
• BTP futures have moved to fresh multi-month highs, participating in the wider FI rally.
• Weekend news flow saw Italian PM Meloni note that it would be a mistake to put the ratification of the reform of the ESM in front of the country’s parliament at present. A quick reminder that our policy team had previously noted that “the Italian government will delay a parliamentary vote to ratify changes to the European Stability Mechanism treaty until after the summer as Rome continues to lobby the European Union over its fiscal rules and EUR200 billion in funding for Italy’s National Recovery Plan,” so this didn’t represent a surprise.
• As such, the news hasn’t yielded a meaningful market reaction.
• Recent weeks have seen Italian headline flow focus on TLTRO repayment worry (which has seemingly receded a little) and strong retail demand at the inaugural BTP Valore offering.
• ECB pushback against any ‘unwarranted’ spread widening, via the TPI, remains a BTP-supportive factor from a medium-term perspective.

Fig. 1: 10-Year BTP/Bund Spread (%)

Source: MNI - Market News/Bloomberg