LIVE MARKETS-Italy-Germany bond spread could drop another 50 bps, investor says

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ITALY-GERMANY BOND SPREAD COULD DROP ANOTHER 50 BPS, INVESTOR SAYS

As Italy headed to the polls in September 2022, it would have seemed far-fetched that the country would be heralded as a beacon of stability by bond investors just over two years later.

The country had four prime ministers in six years before that and investors were demanding 2.5 percentage points, or 250 basis points (bps), more to hold Italian 10-year bonds than German DE10IT10=RR.

But since then the risk premium on Italian debt has plunged to 110 bps - and some investors expect it to continue to drop.

"There is no reason now, especially on this current path, why Italy can't be 60 bps over," says Brian Mangwiro, a bond fund manager at investor Barings ($421 billion AUM). "If you were to ask me, is the direction towards 150 bps or towards 60 bps? I would say it seems to be towards 60 bps."

Mangwiro says the right-wing government of Giorgia Meloni has proven to be stable, and is getting a grip on the country's public finances.

He told Reuters: “One thing that Italy has done extremely well, which Meloni has done very well, is to govern from the centre and have a stable government. And that government stability is what's making Italy reap these rewards.

“Number two, obviously, Italy is the largest recipient of the Next Gen EU funds, the recovery and reconstruction funds, and that's also helping the economy.

“But more important is the deficit. Italy has been running primary surpluses now for a while, and they're reining in the deficit as well, much more than France, much more than the UK."

(Harry Robertson)

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