LONDON, Nov 19 (Reuters) - Italy’s bond market is likely to withstand short-term political uncertainty and the closely watched 10-year bond yield gap over Germany could tighten to 100 basis points next year, NatWest Markets said on Tuesday.
The last time this yield spread was at 100 bps and below was in 2016. A move back to that level would signal a significant turnaround for the Italian bond market given that the gap widened to more than 300 bps during the 2018 political crisis.
“Thinking six months ahead, past some of the short-term questions people have, which will create some volatility, 100 bps on the BTP/Bund spread is a perfectly realistic target,” Giles Gale, head of European rates strategy at NatWest Markets, said during a presentation on the 2020 outlook.
“We’ve had some turbulence in the past few weeks but we are comfortable with that view.”
Italian 10-year bond yields rose to more than two-month highs last week at around 1.44%, pushing the yield gap over Germany to as high as 173 basis points.
Renewed political uncertainty in southern Europe, profit taking after this year’s strong price gains, and concern that European Central Bank stimulus is reaching its limits have hurt peripheral euro zone debt markets recently.
NatWest said Italian bonds faced short-term headwinds given hurdles facing the new government such as approving the budget law. But it added that Italy was its top 2020 pick for peripheral debt markets.
“The government we have now is still fragile and there are hurdles that need to be confronted in the months ahead,” said Giovanni Zanni, chief euro area economist at NatWest Markets.
“But we think the underlying situation is much better and the further we go from the risk of Italy leaving the euro area, then the safer we are and that’s really what matters.”
Reporting by Dhara Ranasinghe Editing by Mark Heinrich