How much can Italian sovereigns benefit from a “Draghi effect”?

Specifically, the tightening of the BTP-Bund spread will translate into a 12 bps fall in 10-year BTP yields representing an upside of around 1%. As per the image below, this would be a move of equal intensity as seen last June, when the country was exiting from the first Covid pandemic wave. Yet, ten-year yields could potentially dive further falling as much as 19bps as seen last May, giving an upside of approximately 2% to 10-year BTP holders. Longer-term BTPs will benefit the most falling as much as 30bps representing a capital gain of roughly 7%. Still, their tightening will be more gradual, and this strategy will require investors to hold these securities for a more extended period.

Italian corporate bonds will also benefit from the news, but less than the county's government bonds as they trade inside the government debt. According to the Bloomberg Barclays Euro-Aggregate Italy Corporate index, they offer an average yield of merely 0.3%.

What happens if Draghi doesn’t become Italy’s PM?

No worries! The spread between the BTP and the Bund will continue to tighten irrespectively of Draghi. However, if the former President of the ECB becomes Prime Minister, the news would give an instantaneous boost to the BTPs. Otherwise, the tightening will be constant, but gradual as the ECB will be forced to add more stimulus to support the European economy. Indeed, the ECB will be the only game in town as a new fiscal package will not come while Germany goes through government elections.