Italian and Greek sovereigns are outperforming their peers. We believe that as the ECB intensifies its accommodative measures, European government bonds will continue to benefit with long-term Italian BTP gaining the most. The 10-year spread between BTP and the Bund will most likely fall below 90bps, while the 30-year spread will trade around 100bps by year-end.
Coronavirus cases are rising everywhere in Europe, especially in Southern European countries. Yet, sovereigns from the periphery continue to rally, seemingly not caring of further lockdown measures that would inevitably deteriorate already weak economies, why?
The European Central Bank is flooding the European market with liquidity, and it is seriously considering to increase its accommodative measures in the next few months. The obsession of the ECB's to aid inflation by printing more money is creating a market distortion that will inevitably end badly. In the meanwhile, countries such as Portugal, Spain and Italy will continue to benefit from it, and they will take advantage of ever low rates by issuing more debt.
Italy and Greece have been so far the best European sovereign investments of the year
Assume you were purchasing €1,000 in 10-year BTPs (IT0005413171) at the beginning of the June at a price of 101, by now you would have already made around 8.5% from your initial investment.
That's not bad considering that you are buying into a European government bond with virtually no risk of default.
Even though over the past few years, Italian sovereigns have been in the news headlines because of political and economic distress, lately they hit the news because of their extreme appreciation. Yesterday, the Southern European country placed for the first time a bond with three year maturity offering a coupon of zero per cent.
Italy has not been alone in the rally, all European bonds have been steadily going up; however, Greece and Italy have arguably been benefitting the most from ECB's accommodative measures.