Italy's Political Stability Boosts Government Bonds

By Antonella Cinelli and Valentina Consiglio

ROME (Reuters) – Italy's political stability is projected to enhance its government bonds in 2024, as uncertainty in Germany and France impacts investor confidence in these countries.

While risks remain, Italy's 2.5-trillion-euro debt market is attracting attention. Despite predictions of further debt increase, investors are finding Italian bonds appealing compared to the struggles faced by France and Germany.

Christopher Dembik, a senior investment adviser at Pictet AM, remarked, "Italy is no longer considered the sick man of Europe." This perception is likely to result in lower debt costs for Italy as it plans to issue between 300 billion to 310 billion euros in medium- and long-term bonds next year.

The yield gap between Italian BTPs and German Bunds has recently narrowed, and with Germany's approaching recession, experts predict this trend could persist.
Investors, especially from Japan, are shifting preferences from French to Italian debt.

Risks

Italy faces pressure from the EU to reduce its deficit, yet Prime Minister Giorgia Meloni’s strategies seem more reliable than the instability in France. Overall, there are predictions of tightening yield spreads in the euro zone, making a narrowing of the BTP-Bund spread to zero increasingly plausible.

However, there are headwinds to consider. A slowing economy might hinder Italy's fiscal plans, and a potential global risk-off sentiment could negatively affect BTPs. France’s internal crises might also become a risk factor for Italy’s bonds.

Most analysts anticipate solid demand for BTPs into 2025, but the BTP-Bund spread is expected to stay above 100 basis points, according to UniCredit strategist Francesco Maria Di Bella.

Germany is struggling with an industrial slump, potentially facing economic contraction in 2024. The upcoming election may exacerbate these challenges.

Ratings

Credit rating agencies could influence Italy's bond dynamics in 2025. Analysts predict that tighter spreads might lead to upgrades for peripheral countries like Italy.
Fitch and DBRS recently improved Italy's outlook, while Moody’s continues to rate Rome just above junk status. Italy’s financial conditions will also depend on successfully utilizing the EU’s post-COVID Recovery Fund, which is crucial for driving growth in 2025.

($1 = 0.9525 euros)

(Graphics by Stefano Bernabei, Editing by Gavin Jones and Alexander Smith)