This morning the European bond market is opening lower as stocks gains. Gilts and Bunds are leading losses with 10-year yields rising by 7 and 4.5 basis points respectively. The German yield curve is bear steepening with the 2s10s Bund spread rising to the widest level since June 2020 in response to the reflation trend seen last week in the US. On the other hand, Gilts are selling off as the UK is rolling out COVID-19 jabs faster than any other country in Europe.
Although sovereign bonds from the periphery are selling off together with their peers, they prove more resilient. The periphery is still benefitting from the entrance of Mario Draghi in Italian politics. Once the selloff in European sovereigns settles down, we will most likely see spread compression in the periphery resuming. Since Giuseppe Conte resigned at the end of January, Italian government bonds across the board rose by 1% in value. Still, long-term bonds provided the most significant upside with the benchmark 30-year BTP increasing 2% in value. The ten-year BTP-Bund spread tightened to 90 basis points to the lowest level seen since 2010. Some analysts are calling for it to tighten to 25bps, the same level BTPs were trading relative to their German peers before the Global Financial Crisis of 2008. The tightening of the spread between BTP-Bund was a trend well-established way before Draghi entered Italian politics, but he accelerated it massively as concerns of anti-European sentiment in Italian politics were put to rest once and for all until the next elections. On one side, it is a unique opportunity for investors to maximize convexity to take advantage of quickly falling interest rates. On the other, the Italian Treasury can take advantage of the positive momentum to issue ultra-long sovereigns. Last week's auctions of 2-, 7- and 20- BTPs showed that market appetite remains solid. It may be the perfect moment to issue a new 50-year BTP which in our opinion would price just a few basis points above the current 50-year benchmark with maturity 2067. We believe that current market conditions enable Italy to test new ultra-long maturities such as 100-years. On the back of the centenary issuance that we have seen from Austria and Ireland, Italy centurion bond would offer roughly 2.5% in yield, making it the highest yielding euro bond issuance after Mexico, which is now offering 3.3% in yield. If you would like to learn about it, click here.
Going back to the United Kingdom, 10-year Gilts opened with a yield of 0.58%, six basis points higher than Friday's close, and the highest since March last year. Suppose positive sentiment continues, and yields sustain trading above 0.55%. In that case, they will find resistance next at 0.65%, a level previously seen at the beginning of 2020. This Wednesday and Thursday Consumer Price Index, Retail Price Index and GfK Consumer Confidence release will affect Gilts' sentiment. Key government bond auctions ahead are the issuance of 2057 and 2035 Gilts on Wednesday and Thursday.