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

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

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Italian sovereigns are better positioned to benefit from a "Draghi effect" compared to corporate bonds if the former President of the European Central Bank is appointed Prime Minister of Italy. The 10- and 30-year BTP-Bund spread have the potential to tighten to test 2015 lows of 100bps and 120bps respectively representing a capital gain up to 7%. Finally, BTPs will benefit from the BTP-Bund spread compression regardless of Draghi. Nevertheless, in a non-Draghi scenario, the tightening will be gradual, forcing investors to hold on BTPs for longer.


I have written a lot about Italian sovereigns explaining why I like them compared to other European peers. However, I have never touched upon probably their most bullish scenario: Mario Draghi, the most dovish President the ECB has ever had, becoming Prime Minister.

Although it seems that a new majority led by Giuseppe Conte will be the most probable outcome, the market cannot discard the probability of a technical government led by Draghi. Such a result will send a pro-European signal provoking a fast tightening of the BTP-Bund spread. At that point, the only question will be "how much upside is there in BTPs"?

We believe that a temporary solution to the Eurosceptic threats coming from the Northern League and the Brothers of Italy parties will push the BTP-Bund spread to 2015 lows: 100bps and 120bps for the ten- and thirty-year spreads, respectively.

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%.

Source: Bloomberg.

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.

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore has not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.