BTPs are having a good start to the week, but concerns still remain about the Italian economy in the bigger picture
The Italy-Germany 10-year yields spread has narrowed by 10 bps today, falling to 264 bps after Fitch reaffirmed Italy's credit rating on Friday at BBB status with a negative outlook. The rally in BTPs today is nothing more than one of relief as Fitch's decision takes the edge out of downgrade fears ahead of upcoming reviews by Moody's and S&P.
That said, this is nothing more than what the headline suggests. It is but a relief rally as the bigger picture of possible snap elections and high level of government debt (with poor fiscal handling) is likely to continue to pose risks to the Italian economy.
And with economic growth slumping to a technical recession at the end of last year, things aren't looking great to say the least. With regards to the Italy-Germany 10-year yields spread, we might not see a return to the highs experienced last year. But given the economic outlook, it is more than likely that the levels will still stay elevated.
As such, I wouldn't expect any solid rallies to come about from Italian bonds as long as there is still prospects of a further slump in the economy and high political risks weighing. In turn, that's one less reason to help support the euro and continue to be a minor impediment for the single currency this year.
