Why the BTP is destined to fall again-proiezionidiborsa.it
The BTP Bund spread today rose by 1.6% and reached the 187.65 area. For the moment, from a graphical point of view, it continues to aim towards 190 and then 210. The ECB (as per predictive and contingent indicators) will probably raise rates again in the coming months to bring inflation within the limits envisaged by its mandate. This is one of the many reasons why the BTP is destined to fall further.
Could this shock be repeatable?
All the other long-term government bonds of the other European countries are in the same situation. Why this? Simple and trivial, because with the rise in interest rates, the new issues will provide higher coupons, and therefore the old issues will have to adapt by lowering the price of the security.
Let’s take a macaronic example but that gives the idea.
Interest rates at 2%.
The coupon of the 10-year BTP yields 2% and it was issued at 100. Rates rise to 4% one month after issue. How far does the price have to fall to adjust to the new interest rate level? About 80.
In addition to the interest rates, the BTP Bund spread also affects the price of the BTP, which is “a country risk parameter”. We do not believe that in the coming weeks we will see a surge in the spread for this reason and the reason is simple. Many of us remember 2011 when the Berlusconi government was forced to resign. At that moment the spread exceeded 500 points. The reason was because the economic stability of our country was starting to be questioned. According to estimates by the ImpresaLavoro study centre, that situation cost our coffers around 50 billion, equal to 3 percentage points of GDP.
We are a heavily indebted country and, until the public accounts are put in order, this will expose us to possible turbulence on the financial markets.
At the moment, therefore, we believe it is unlikely that a situation similar to that of 2011 can be repeated with the current government (the majority seems solid and the program seems to be enjoying success among institutional investors from all over the world). At that time, as per statements also of Bank of Italy, the increase in the spread “concerned creditworthiness”, ie the solidity of our country was perceived as at risk.
So why is the BTP destined to fall again?
The reasons therefore do not concern stability or attacks on our government or distrust of it. The reasons are numerical: if interest rates continue to rise, the price of our current long-term Treasury bonds will fall to adjust their yield to new issues. Which has happened to date. In fact, in August 2021 the Future was quoted at 141.65, and today at 113.84.
So, mind you, this is not about the stability or confidence that investors have in our government. If the spread then shot up, this would be another couple of days, but even in this case the reasons for that trend should be carefully studied.
What will interest rates and therefore our BTPs do?
We have repeatedly explained on these pages that the parameter is the BTP Future. If the price falls, the yields of the BTPs rise; if it goes up, vice versa.
Graph analysis
Between September and November 2022 a monthly bullish bar had formed and therefore from that level the Future had risen, as well as the prices of the BTPs. A new bearish signal formed in December. From then on, prices are moving sideways with the bearish signal predominant.
From the moment in which further rate hikes in the Euro area will most likely begin to be discounted, we will see the BTP Future fall below current levels and the yields of BTPs rise. As a result, the new issues will distribute higher coupons.
A weekly close below 112.51 would cause prices to drop towards 108 and then 97. From a graphical point of view, this movement currently has a high probability of occurring! For the moment, this bearish view would only be disavowed by a return above 119.17 at the end of the month.
Why is the BTP destined to fall again? We just explained it.
So be careful: anyone who wants to buy BTPs today must know that prices could drop on the secondary and that future issues could instead distribute an even higher coupon.
If the BTPs go down, then it won’t be an attack on Italy, we should only worry if the spread shoots up for reasons that concern problems relating to our country’s system.
So beware of exploitation…Who dicand that Italy does not enjoy esteem at the moment, he should look at our stock list: in recent months it has been among the best in the world! And that says a lot, a lot…
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