Sovereign peripheral valuations look immersed in a rally that has taken them to spread levels vs. core bonds not seen since 2021. In general terms, this performance has benefited peripherals across the board and particularly BTPs. As such, now seems a good time to assess whether and to what extent peripheral valuations may be changing and how much this rally could extend. For this, we adopt a two-side approach covering both global factors impacting peripheral bonds as an asset class as well as the specific/idiosyncratic elements driving BTPs to spearhead the move.
Global factors constructive in the short term, probably less so further out. i) Peripherals are benefiting from risk-on mode; ii) dovish monetary policy expectations provide underlying support; iii) pure macro considerations do not appear to be the main driver of yields while iv) regulatory/institutional factors are definitely playing a supportive role for bonds (e.g., SLR consideration for the US market; Dutch pension reform). Not all of them look like extending or intensifying in the future.
Idiosyncratic factors: tactical drivers will be less supportive in 2H25 but fundamentals are improving. i) Italian growth remains exposed to global economic factors; ii) the fiscal figures are better than expected; iii) rating agencies are now a structural support factor, while politics look no longer a real risk factor; iv) European investors are net buyers of BTPs (while non-EU foreign investors appears, for now, to be less pronounced and more episodic); v) strong negative net supply in the EGB markets in the last three weeks supported peripheral spreads dynamic; vi) BTP future contracts indicated a recent structural unwinding of short positioning on Italy.
BTPs: how much of a win/win story? We expect the BTP-Bund spread to stabilize within a trading range of 105–90bp in Q3 2025, and then tighten further into a range of 95–80bp in Q4 2025 and into 2026. Compared to other EGB curves, our expectations are as follows: i) BTP (almost) flat OAT within one year; ii) a steepening of the 1Y–3Y segment of the Italian credit curve in relative value (RV) terms versus Spain by year-end; iii) the Italian 10Y–30Y curve to be steeper than other EGB curves in H2 2025, followed by a flattening recovery in 2026. For those who missed the recent BTP-Bund spread tightening, CCTs and BTPs Italia are still offering interesting pick-up vs. BTPs.