In recent days, we are witnessing a strong drop in price of the government bonds and bonds europee, while, on the contrary, the returns they are climbing quickly, putting investors under pressure and causing significant losses in bond portfolios. In particular, the yield of the BTP he returned to the 4% threshold and, even more surprisingly, that of the German bund went up close to 3%. But while rising yields were once seen as a risk factor and disaffection by investors, they are now mostly seen as an investment opportunity, especially on the short end of a curve which in the meantime has happened significantly steepened. Let's see why.
Expected huge emissions from Germany to finance defense and infrastructure
We are in the middle of a historical turning point on the markets. At the heart of this situation is the decision of the Germany which, historically linked to the rigor on public accounts, stands now breaking some taboos fundamentals with a maxi plan of about 900 billion of euros earmarked for infrastructure, reconstruction and defence, responding above all to the lack of US military shield. This plan also involves a constitutional reform to exclude part of military spending from the public debt calculation. Germany is also famous for being able to act quickly after the decisions of the new government (expected by Easter) and will quickly move on to new emissions.
German Bund Yield Seen Rising Further: Up to 3,20% or Even 3,75% from Current 3%
On the markets, this new orientation has triggered a generalized sale of long-term bonds and pushed yields up: that of XNUMX-year bund German is close to 3%, a peak once thought to be unattainable. But analysts still see room for growth in relation to the speed and incisiveness of Germany in finalizing the financing plan. "The yield on the XNUMX-year could thus reach the 3,20/25%” says Antonio Cesarano Chief Global Strategist of Intermonte. Goldman Sachs he sees him go up even at 3,75%.
Btp at 4%. The spread could widen. But the ECB is ready to intervene
The movement was almost parallel in other countries as well. yield of the BTP 4-year is around XNUMX%, about one point above the average cost of entire debt Italian public, which is around 3% (with an average lifespan of around 7 years).
In this situation, the spread between BTP and Bund could widen further, even if Germany will be the one to get into debt the most, on the expectation of general increase in the cost of debt. “However, even if the spread were to widen, the European Central Bank, with the Anti-fragmentation Plan, remains ready to activate containment measures on one or more countries to avoid excessive distortions on the bond markets, says Cesarano.
The yield curve for 2-10 year BTPs has steepened significantly. “In a context of generalised rise in yields, investors should adopt a prudent approach. It is advisable to initially focus on bonds with short deadline, limiting the risk deriving from further rate increases” observes Cesarano. “However, even longer-term securities, such as ten-year BTPs, can offer interesting opportunities, provided they are purchased with yields significantly above 4%”.
Investing in BTPs becomes an opportunity
Compared to the beginning of December, the yield on the 10-year BTP has increased by approximately 80 basis points (+0,8%), opening a interesting new window for retail investors. This opportunity could offer a solid inflation protection, considering long-term expectations that remain contained. The increase in yields on BTPs this time therefore it is not linked to specific difficulties in Italy or one crisis of confidence in sovereign debt, he observes Jacobo Ceccatelli, managing director of Finint Private Bank and head of Macro and Fixed Income analysis. “The bulk of the movement in yields occurred after the announcement of the fiscal plans of the probable new German government,” Ceccatelli explained to We Wealth. “Markets expect an increase in the supply of government bonds, not only in Germany but across Europe, including pan-European issues such as those of the European Union or financial vehicles created in the last ten years (ESM). This implies a rebalancing of supply and demand on higher levels of yield.” “With a gross yield of 4% and expected inflation around 2%, the'investment is interesting” says Ceccatelli.
Beyond BTP: The Alternative to Inflation-Indexed Bonds
In addition to fixed-coupon BTPs, also inflation-indexed securities could become interesting again to diversify the portfolio, especially compared to CCTs. “Securities linked to inflation are becoming interesting again, especially BTP Italia, which have guaranteed a good extra return to retail subscribers with the last revaluation,” Ceccatelli says. On the contrary, “CCTs have been excellent in the past, but with rates falling they could lose their appeal, given that the ECB is unlikely to push rates up again in the short term.”
Green Bonds vs Military Bonds
The European rearmament led by Germany could also change the priorities of institutional investors, say analysts at Intermonte. In recent years, attention had been focused on sustainable investments, with green bond issues. Today, however, part of the resources could be directed towards new military bonds, securities intended to directly finance defense and security projects. This is a clear transition towards an economy more oriented towards military and strategic needs than in the past, with a probable redefinition of the balance of the European bond market.
