Mizuho Cautious On BTPs Over Next Few Days, Still Expect Further Tightening Over Coming Months

Mizuho write “the BTP/Bund tightening seen since late 2023 is not too surprising if you look at the relative economic performance between Italy and Germany… and Italian political stability that ensures ongoing EU funds.”

• “Additionally, risk sentiment remains well supported, likely encouraging investors to think about BTPs when adding fixed income.”
• “We think all these factors will most likely remain in place in the next few months and may impact the next round of Italian rating revisions via a potential change in outlook to positive.”
• “We think the 10Y BTP-Bund spread could test ~100bp in the next few months.”
• “The very short-term view (one week) is less clear, which is why we are looking for the spread to test the 135-140bp area before reloading compression trades.”
• “We believe investors may be short covering in Bunds and we see this flow likely continuing for a few more sessions.”
• They also flag increased geopolitical risks in the immediate term.