BTPs and Spreads No Longer Trust Lagarde, Returns Return to 2013 By

By Alessandro Albano – The situation has not improved after a violent sell-off. Also complicit in expectations of interest rate hikes abroad, the 10-year BTP is moving to November 2013 levels (over 4.1%), with its counterpart moving dangerously high at 248 basis points.

Also high pressure on the so-called “core” bonds, which guaranteed negative returns to bondholders for up to four months: the French posted a return of 2.28%, while the German posted a return of 1.65%.

It seems clear that the credit market no longer trusts Christine Lagarde’s strategy and measures taken by Frankfurt at Thursday’s meeting, such as the anti-spreading shield and the early end of the quantitative easing program that precedes a .25 basis point rate hike at the July and September meetings.

“The end of quantitative easing presents a clear threat to financial stability,” Nicholas Forrest, head of global fixed income at Candriam, wrote in a note, stressing how “the Italian spread has widened significantly” after the central bank meeting.

“Although markets are speculating on a framework to control spreads, no additional instruments have been introduced,” the director said, and according to him the risks of market fragmentation “are significant and there is no doubt that the ECB is expected to provide details on a potential new instrument.” in the coming months.”

With the European Union reaching new highs last month, another change in the narrative is being introduced by the movement of real returns, noted Guido Ginakari, well-known trader and founder of Trading Room Rome, to The spread moves in the 240-250 bps range with btp yield at 4% and inflation at 7%, hence with negative real returns at -3%. Compared to 2011, the spread was at 570 basis points, the return on a basis point at 7.2% and inflation at 3.7%, thus with positive real returns of 3.5%. Herein lies the difference between 2011 and today in the real yield points of 6.5% which are due to the exceptional expansion of the ECB’s balance sheet.”

The expert asks, “Will it be possible to implement a restrictive monetary policy without entering a recession or stagflation?” And the room to maneuver appears to be reduced.”

“In the meantime, perhaps today we will be able to see btp (at coupon 1.7) fall below 50 euros: how long has that not happened? Italian government bonds will certainly be an opportunity to buy, in the long term, when equity reaches its lowest Their levels and therefore interest rates will go higher before returning to expansionary monetary policies,” adds Genakari.

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